THE  INTERNATIONAL  TRADE  BALANCE 

IN 

THEORY  AND  PRACTICE 


1C 


THE    MACMILLAN    COMPANY 

NEW  YORK    •     BOSTON    •    CHICAGO    •    DAIXAS 
ATLANTA    •    SAN  FRANCISCO 

MACMILLAN  &  CO.,  Limited 

LONDON    •    BOMBAY    •    CALCUTTA 
MELBOURNE 

THE  MACMILLAN  CO.  OF  CANADA,  Lro. 

TORONTO 


THE    INTERNATIONAL 
TRADE    BALANCE 

IN 

THEORY  AND  PRACTICE 


BY 

THEODORE  H.  BOGGS,  Ph.D. 

PROFESSOR    OF   ECONOMICS    IN    THE    UKIVERSITT 
OF   BRITISH    COLUMBIA 


THE  MACMILLAN  COMPANY 
1922 

All  rights  reserved 


^^^. 


FEINTED  IN  THE  UNITED   STATES   OT  AMERICA 


Copyright,   1922, 
Br  THE  MACMILLAN  COMPANY. 


Set  up  and  printed.    Published  October,  1922. 


Press  of 

J.  J.  Little  &  Ives  Company 

New  York,  U.  S.  A, 


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To 

THE    MEMORY   OF 

MY  WIFE 


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PKEFACE 

A  natural  and  inevitable  result  of  the  vast  war- 
induced  lending  and  borrowing  operations  of  re- 
cent years  has  been  a  greater  popular  interest  in 
the  nature  and  significance  of  the  international 
equation  of  indebtedness.  The  question  of  the 
balance  of  trade  had  formerly  but  a  limited  appeal. 
It  was  believed  to  concern  few  other  than  the  for- 
eign exchange  broker  and  the  student  of  foreign 
trade.  To-day  it  receives  more  general  attention 
for  the  reason  that  its  importance  is  far  more 
widely  recognized.  Financial  operations  between 
nations  are  to-day  conducted  on  so  large  a  scale 
that  the  net  position  of  any  country  as  a  lender  or 
borrower  may  be  quickly  altered.  A  change  of 
this  nature  is  soon  reflected  in  the  merchandise 
trade  balance,  and  this  in  turn  serves  to  arrest  pub- 
lic attention.  A  further  factor  in  this  new  and 
much  more  widespread  public  interest  has  been  the 
extraordinary  fluctuations  of  foreign  exchange 
within  recent  years. 

This  book  is  an  attempt  to  set  forth,  with  a 
reasonable  measure  of  fullness,  the  principles  un- 
derlying the  theory  of  the  balance  of  trade,  and 
their  practical  application,  as  revealed  in  the  trade 


viii  PREFACE 

balances  of  various  countries.  In  order  to  facili- 
tate a  comparison  of  the  results  obtained,  the  writer 
has  estimated  these  balances,  for  the  several  coun- 
tries considered,  for  the  same  period,  namely,  the 
years  1911-13.  The  closely  related  question  of 
foreign  exchange  has  necessarily  also  received  a 
considerable  measure  of  attention. 

The  author  wishes  to  acknowledge  his  personal 
sense  of  indebtedness  to  Professor  A.  G.  Keller,  of 
Yale,  whose  inspiration  first  stimulated  his  in- 
terest in  sociology  and  economics.     To  Professor 

F.  H.  Dixon  of  Princeton,  the  late  Professor  G.  R. 
Wicker  of  Dartmouth,  Professor  H.  F.  Angus  of 
the  University  of  British  Columbia,  and  Mr.  W. 

G.  Sutcliffe,  Lecturer  at  Simmons  College,  the 
writer  is  under  obligation  for  helpful  criticisms 
and  valuable  suggestions. 


Theodore  H.  Boggs. 


Vancouver,  Canada, 


June,  1921. 


CONTENTS 

CHAPTER  PAGE 

I.     The  Theory  of  the  Balance  of  Trade  .         1 

II.     The   Balance   of   Trade   of   the   United 

States 42 

III.  The  Trade  Balance  of  the  United  King- 

dom   80 

IV.  The  Canadian  Balance  of  Trade  .      .      .     119 

V.     The  Indian  Trade  Balance 159 

VI.     The  Balances  of  Trade  of  Australia,  New 

Zealand,  and  South  Africa     .     .     .     187 


INTERNATIONAL  TRADE  BALANCE 
IN  THEORY  AND  PRACTICE 

CHAPTER  I 

THE  THEORY  OF  THE  BALANCE  OP  TRADE 

The  intimate  relationship  between  foreign  trade 
and  the  international  ebb  and  flow  of  capital  is  now 
generally  conceded.  It  is  recognized  that  the  com- 
mercial relations  of  nations  comprise  more  than  the 
mere  exchange  of  commodities.  The  exports  and 
imports  of  goods  form,  it  is  true,  a  major  element 
in  the  aggregate  of  commercial  transactions.  Yet 
there  are  other  important  factors  whose  influence, 
long  undetected,  is  now  acknowledged. 

Since  the  close  of  the  World  War  the  connection 
between  foreign  trade  and  the  international  move- 
ment of  capital  has  come  to  enjoy  a  wider  recog- 
nition. Many  have  become  persuaded  of  the  truth 
of  the  principle  when  confronted  by  the  prospect 
of  altered  conditions  in  the  foreign  trade  of  their 
own  country,  the  changes  coming  in  large  part  as 
a  result  of  the  vast  lending  and  borrowing  opera- 
tions of  the  war.  We  are  beginning  to  see,  as  per- 
haps never  before,  that  the  foreign  investment  of 

1 


2    INTERNATIONAL  TRADE  BALANCE 

capital  brings  in  its  wake  many  trade  consequences. 
The  axiom  that  "trade  follows  the  flag"  may  be 
paraphrased  to  fit  the  present  situation  by  saying 
that  trade  follows  the  foreign  investment. 

The  important  principle  that  finance  is  a  pio- 
neer of  trade  may  be  supported  by  evidence  drawn 
from  the  experience  of  many  countries.  That  of 
Great  Britain  will  perhaps  suffice  for  the  purpose 
of  illustration.  Although  her  preeminence  in  in- 
ternational trade  has  been  powerfully  furthered  by 
her  merchant  marine  and  extensive  colonial  em- 
pire, yet,  in  the  final  analysis,  we  would  probably 
find  the  principal  key  to  her  commercial  supremacy 
in  the  vastness  of  her  overseas  investments.  Brit- 
ish capital  invested  abroad  has  been  variously  esti- 
mated as  amounting  in  1914  to  from  |15,000,000,000 
to  120,000,000,000.  While  functioning  as  a  great 
silent  factor,  it  none  the  less  has  served  effectively 
to  insure  both  imports  of  raw  material  for  her  in- 
dustries and  foreign  markets  for  her  exports.  Com- 
menting on  this  general  principle,  Sir  George  Paish 
declared,  in  1909,  that  "the  investment  in  the  last 
sixty  years  of  about  £2,500,000,000  of  British  cap- 
ital has  occurred  simultaneously  with  a  vast  growth 
of  British  trade  and  prosperity,  and  in  my  opinion 
this  growth  of  our  trade  and  prosperity  is  largely 
the  result  of  our  investment  of  capital  in  other 
countries."  ^ 

Both  the  volume  of  a  nation's  foreign  trade  and 

*  Paish,  "Great  Britain's  Capital  Investments  in  Other  Lands," 
Journal  of  Royal  Statistical  Society,  September,  1909. 


THEORY  OF  THE  BALANCE  OF  TRADE   3 

the  nature  of  its  trade  balance  alike  are  affected  by 
the  international  flow  of  capital/  Generally  speak- 
ing, the  trade  balance  reflects  the  net  position  of  a 
country  as  a  lender  of  capital  for  overseas  invest- 
ment or  as  a  borrower  of  foreign  capital  for  domes- 
tic investment.  This  principle  applies  equally  to 
countries  with  an  excess  of  imports,  such  as  the 
United  Kingdom,  France,  and  pre-war  Germany, 
and  to  those  with  an  excess  of  exports,  such  as  the 
United  States  and  the  Argentine.  Moreover,  a  na- 
tion's trade  balance  may  in  time  undergo  a  transi- 
tion to  conform  to  changes  which  may  appear  in 
its  position  as  a  lender  or  a  borrower  of  capital. 

As  generally  used,  the  term  "trade  balance"  is 
applied  to  a  country's  foreign  trade  in  merchan- 
dise. It  is  used  for  the  purpose  of  indicating  the 
excess  value  of  the  merchandise  exports  over  mer- 
chandise imports  or  the  excess  value  of  such  im- 
ports over  exports.  In  financial  circles  the  term 
is  employed  to  denote  the  condition  of  foreign 
trade  which  enables  a  country  to  import  supplies 
of  the  precious  metals,  or  the  reverse  condition 
which  necessitates  the  exportation  of  the  same. 

Through  the  modern  development  of  commerce 
and  international  banking  we  have  learned  to 
recognize  the  fallacy  present  in  the  "Mercantile 
Doctrine,"  so  widely  accepted  during  the  sixteenth, 
seventeenth,  and  eighteenth  centuries.  It  was  then 
believed  that  a  country  must  secure  a  favorable 
balance  of  trade,  a  balance,  that  is  to  say,  of  mer- 
chandise exports  over  imports,  if  it  would  escape 


4    INTERNATIONAL  TRADE  BALANCE 

tlie  ruinous  consequence  of  having  its  stock  of  the 
precious  metals  drained  away.  The  views  then 
current  appear  concisely  in  an  essay  by  Josiah 
Tucker,  the  Dean  of  Gloucester,  on  the  advan- 
tages and  disadvantages  of  foreign  trade,  published 
about  1750.^    He  declared  in  one  passage  that : 

"A  trade  may  be  heneflcial  to  the  nation,  where 
the  imports  exceed  the  exports,  and  consequently 
the  balance  paid  in  specie,  if  that  trade,  directly 
or  indirectly,  is  necessary  for  the  carrying  on  of 
another  more  profitable  and  advantageous.  But 
then  it  is  to  be  observed,  this  trade  is  not  beneficial 
considered  in  itself,  but  only  as  it  is  relative  and 
subservient  to  the  carrying  on  of  another.  This  is 
the  case,  with  respect  to  the  greatest  part  of  our 
trade  to  the  Baltick,  and  the  East  Indies:  They  are 
instrumental  in  procuring  a  balance  elseivhere, 
though,  properly  speaking,  disadvantageous  in 
themselves.  Which  brings  the  matter  to  the  point 
from  whence  we  set  out;  viz.,  'That  the  science  of 
gainful  commerce  consists,  ultimately,  in  procur- 
ing a  balance  of  gold  or  silver  to  ourselves  from 
other  nations'." 

To  the  statesmen  and  financiers  of  that  time  it 
was  accordingly  a  matter  of  supreme  concern  to 
attain  and  retain  a  balance  of  exports  over  imports. 
Much  legislation,  therefore,  was  passed  for  the 
purpose  of  restricting  imports  and  stimulating  ex- 
ports. The  process  of  estimating  a  country's  trade 
relations  and  commercial  soundness  is  not,  however, 

*  Tucker,  "Essay  on  the  Advantages  and  Disadvantages  whicL 
respectively  attend  France  and  Great  Britain  in  regard  to  Trade, 
with  Proposals,"  etc. 


THEORY  OF  THE  BALANCE  OF  TRADE   5 

so  simple  as  the  mercantilist  theorists  supposed. 
They  failed  to  see,  at  any  rate  understandingly, 
that  the  imports  and  exports  of  goods,  important 
as  they  are,  form  but  one  element  in  the  total  of 
international  exchanges.  It  is  not,  therefore,  as 
Professor  Bastable  has  shown,  "the  equivalence  of 
imports  with  exports  that  constitutes  the  stable 
condition  of  trade,  but  the  equivalence  in  the  sum 
of  debts  due  to  the  country,  and  that  of  debts  due 
by  it."  The  balance  of  merchandise  trade  became 
so  exaggerated,  in  the  view  of  the  mercantilists,  that 
the  other  factors  were  overlooked. 

In  modern  times  we  have  come  to  see,  as  Sir 
George  Paish  points  out,  "that  a  nation  could,  un- 
der certain  circumstances,  purchase  goods  of  a 
greater  aggregate  value  than  it  exported  without 
sustaining  any  drain  upon  its  stock  of  the  precious 
metals  or  suffering  any  inconvenience  whatsoever ; 
and  in  recent  time  no  one  has  paid  any  great 
amount  of  attention  to  the  question  of  the  trade 
balance  other  than  for  the  purpose  of  ascertaining 
the  factors  which  caused  the  imports  of  certain 
countries  largely  to  exceed  their  exports  or  of  dis- 
covering the  reason  for  the  exports  of  certain  coun- 
tries largely  exceeding  their  imports."  It  is  now 
recognized  that  a  nation's  foreign  trade  will  adjust 
itself  more  or  less  quickly  to  the  needs  of  that 
country  and  that  under  normal  conditions  the  ef- 
fect of  some  disturbing  factor  which  may  reduce 
temporarily  its  exporting  ability  may  be  counter- 
acted by  financial  operations  in  the  international 


6    INTERNATIONAL  TRADE  BALANCE 

money  markets.  Thus,  save  under  the  stress  of 
some  abnormal  influence  on  the  scale  of  the  Euro- 
pean War,  little  apprehension  need  be  felt  that  an 
excessive  drain  can  occur  of  the  precious  metals. 
Nevertheless,  evidence  still  abounds  that  the  dic- 
tum of  Sir  Robert  Giffen  that  "the  'balance,  of 
trade'  and  'the  excess  of  imports  over  exports'  are 
pitfalls  for  the  amateur  and  unwary"  has  lost  little 
of  its  pertinency. 

Generally  speaking,  those  countries  of  the  world 
which  have  an  excess  of  merchandise  imports  over 
merchandise  exports  are  the  capital-lending  coun- 
tries, whereas  those  whose  exports  exceed  imports 
are  the  borrowing  countries.  This  is  so,  because 
the  lending  country  must  secure  payment,  in  the 
form  of  imports,  not  only  for  its  merchandise  ex- 
ports, but  also  for  the  interest  upon  its  capital 
invested  abroad  in  earlier  years.  Similarly,  if  we 
exclude  other  factors  from  consideration,  the  cap- 
ital-borrowing country  must  export  more  goods 
than  it  imports  in  order  to  offset  the  merchandise 
imported,  as  well  as  to  meet  the  interest  charges 
upon  the  capital  which  it  has  previously  borrowed. 
True,  during  the  early  stages  of  capital  investment, 
the  lending  country  will  normally  show  an  excess 
of  exports.  Were  these  capital  investments  to  ex- 
tend over  one  year  only,  the  excess  of  merchandise 
exports  of  the  lending  country  during  the  period 
in  question  would  approximately  measure  the 
amount  of  the  capital  loaned  abroad.  As  time 
elapses,    however,    the   total    capital   invested   in 


THEORY  OF  THE  BALANCE  OF  TRADE   7 

other  countries  increases,  although  at  a  diminish- 
ing percentage  rate,  while  at  the  same  time  the 
annual  interest  charges  owed  to  the  creditor  na- 
tion show  a  more  than  corresponding  percentage 
increase.  Eventually  the  time  will  arrive  when 
the  annual  payments  which  the  lending  country 
receives  as  interest  on  its  foreign  investments  will 
exceed  the  new  and  additional  capital  which  it  may 
lend  each  year.  The  same  reasoning  may  be  em- 
ployed to  show  that  the  borrowing  country,  during 
the  early  stages,  will  normally  import  a  larger 
amount  of  merchandise  than  will  be  exported,  and 
that  here,  too,  the  passing  of  time  brings  in  its 
wake  a  change  in  the  trade  balauce.  Ultimately 
the  annual  interest  payments  of  the  borrowing 
country  on  account  of  capital  previously  obtained 
will  surpass  in  amount  the  new  capital  which  it 
borrows  each  year.  Thus,  in  the  end,  its  merchan- 
dise exports  will  overtake  and  then  exceed  its  im- 
ports. 

From  the  foregoing  summary  we  note  that  on  the 
basis  of  their  capital  investments  and  trade  bal- 
ances there  are  four  general  groups  of  countries. 
They  are  as  follows : 

1.  Countries  which  have  begun  to  invest  capital 
abroad  in  other  lands.  These  we  may  call  the  im- 
mature lending  countries.  Their  trade  will  nor- 
mally be  marked  by  an  excess  of  exports.  Eng- 
land during  the  early  years  of  the  nineteenth  cen- 
tury typified  this  group.  At  that  time  she  regu- 
larly exported  goods  to  a  greater  value  than  she 


8    INTERNATIONAL  TRADE  BALANCE 

imported.  These  represented  the  goods  she  was 
lending  abroad.  The  United  States,  since  1917, 
may  also  be  considered  an  immature  lending 
country. 

2.  Countries  which  have  in  the  past  invested 
abroad  so  large  a  volume  of  capital  that  the  annual 
interest  payments  thereon  owed  to  them  exceed  the 
new  and  additional  capital  that  they  may  continue 
to  lend  each  year.  These  we  may  designate  as  ma- 
ture lending  countries.  Their  trade  balance  will 
be  marked  normally  by  an  excess  of  imports.  Eng- 
land for  approximately  a  century  has  been  the 
great  example  of  this  type  of  country.  And  we 
may  anticipate  that  in  the  not  remote  future  the 
United  States,  having  become  a  mature  lender,  will 
find  her  trade  balance  marked  also  by  an  excess  of 
imports. 

3.  Countries  which  are  in  the  habit  of  borrow- 
ing capital  from  abroad,  but  whose  volume  of  cap- 
ital thus  borrowed  is  not  so  large  that  the  resul- 
tant annual  interest  charges  thereon  shall  equal 
the  new  and  additional  capital  that  they  may  im- 
port each  year.  These  countries,  the  immature  bor- 
rowers, have  trade  balances  marked  normally  by 
an  excess  of  imports.  Canada,  prior  to  1914,  was 
in  this  stage  of  borrowing.  The  United  States, 
likewise,  prior  to  1874  was  an  immature  borrower. 

4.  Countries  that  have  borrowed  from  abroad 
so  large  a  volume  of  capital  that  the  annual  interest 
charges  exceed  in  amount  the  new  capital  that  they 
may  annually  procure  from  abroad.    To  such  coun- 


THEORY  OF  THE  BALANCE  OF  TRADE   9 

tries  we  may  apply  the  term  mature  borrowers. 
Their  balance  of  trade  will  show  an  excess  of  ex- 
ports. India  typifies  this  group.  The  United 
States  reached  this  stage  about  1874,  and  only  re- 
cently, largely  as  a  result  of  the  financial  opera- 
tions of  the  war,  has  emerged  therefrom  into  the 
position  of  the  immature  lending  country.  Canada 
is  now  passing  from  the  condition  of  an  immature 
borrower  to  that  of  a  mature  borrowing  country. 

The  above  classification  may  perhaps  be  made 
more  clear  by  an  analogy  from  the  field  of  indi- 
vidual investment.  Let  us  imagine  the  case  of  an 
eccentric  investor.  A,  who  determines  to  purchase 
one  one-hundred  dollar  bond  of  a  corporation  X 
each  year  for  an  indefinite  period.  Let  us  assume 
that  the  interest  payable  annually  on  the  bond  is 
at  the  rate  of  four  per  cent.  During  the  first  year, 
therefore,  under  these  circumstances,  A  will  in- 
vest $100  in  the  securities  of  the  corporation,  and 
in  turn  will  receive  |4  in  the  form  of  interest. 
During  the  second  year  A's  investment  again  is 
$100,  while  his  interest  now  amounts  to  $8.  In  the 
twenty-fourth  year  A's  investment  is  still  $100, 
but  his  interest  return  has  now  reached  $96.  From 
the  twenty-sixth  year  onward  the  annual  interest 
payable  to  A  is  obviously  larger  than  his  new  an- 
nual investment,  and  increasingly  so. 

In  applying  the  analogy  it  is  of  course  recognized 
that  the  use  of  the  terms  "mature"  and  "immature," 
as  attached  to  investors  and  borrowers,  is  arbi- 
trary.   Yet  such  use,  even  in  a  restricted  sense,  is 


10   INTERNATIONAL  TRADE  BALANCE 

not  without  merit.  The  term  "mature"  is  used  as  a 
convenient  substitute  for  the  clause  "in  the  later 
stages,"  while  the  term  "immature"  implies  "in  the 
earlier  stages."  We  may,  therefore,  consider  our 
investor,  A,  an  immature  investor  or  lender  during 
the  first  twenty-four  years  of  the  hypothetical 
transaction.  During  this  period  A's  new  annual 
investment  exceeded  the  interest  which  he  annually 
received.  In  and  after  the  twenty-sixth  year,  A 
became  a  mature  investor.  His  new  investment 
each  year  was  now  surpassed  by  the  annual  in- 
terest received  by  him.  It  is  in  this  sense  that 
England  is  referred  to  above  as  an  immature  lend- 
ing country  during  the  early  years  of  the  nineteenth 
century,  and  as  a  mature  lender  in  recent  decades. 
Likewise,  the  status  of  the  United  States  as  an  im- 
mature borrower  prior  to  1874  may  be  likened  to 
the  position  of  corporation  X  during  the  first 
twenty-four  years ;  a  period  in  which  the  corpora- 
tion borrowed,  or  obtained,  from  A,  a  larger  amount 
of  capital  each  year  than  the  corporation  was  called 
upon  to  pay  to  A  in  the  form  of  interest.  From 
1874  onward  till  about  1917,  the  United  States 
may  be  looked  upon  as  a  mature  borrowing  coun- 
try; in  the  same  sense  in  which  corporation  X  be- 
came a  mature  borrowing  concern  in  the  twenty- 
sixth  year,  from  which  time  onward  X  borrowed,  or 
obtained,  from  A  an  amount  of  new  capital  each 
year  less  in  volume  than  the  interest  payable  to  A. 
It  is,  of  course,  recognized  that  in  the  ebb  and 
flow  of  capital  internationally  the  process  of  lend- 


THEORY  OF  THE  BALANCE  OF  TRADE  11 

ing  and  borrowing  does  not  proceed  on  so  uniform 
and  arbitrary  a  basis  as  that  depicted  in  the  above 
transaction.  The  volume  of  capital  which  a  country 
may  lend  or  borrow  varies  from  year  to  year,  and 
the  interest  rate  is  not  uniform  on  all  loans.  And, 
moreover,  the  same  country  may  engage  in  both 
lending  and  borrowing  operations.  Yet  the  essen- 
tial fact  remains  that  in  the  career  of  a  lending 
country  a  time  will  be  reached  sooner  or  later  when 
the  new  capital  loaned  abroad  each  year  will  be 
equaled  and  later  surpassed  by  the  amount  of  in- 
terest payable  annually  to  that  country  on  account 
of  its  earlier  foreign  investments.  By  the  same 
form  of  reasoning,  a  point  will  be  reached  some 
time  in  the  career  of  a  borrowing  country  when  the 
new  annual  capital  borrowings  will  be  surpassed 
by  the  volume  of  interest  payable  abroad  on  the 
capital  already  imported. 

In  view  of  the  importance  of  international  bor- 
rowing and  lending  as  a  factor  in  the  determina- 
tion of  the  balance  of  trade,  let  us  consider  more 
concretely  the  manner  in  which  the  lending  of 
capital  overseas  works  out  its  effects.  The  vast 
sums  of  capital  invested  by  England  in  India, 
Egypt,  the  United  States,  the  Argentine  Republic, 
etc.,  for  railway  development,  harbor  construction, 
irrigation  works,  and  other  purposes  are  now  rep- 
resented by  national  or  private  debts  of  all  kinds, 
such  as  government  stocks  and  bonds,  railway  and 
land  companies'  shares,  and  all  other  forms  of 
public  and  private  indebtedness. 


12    INTERNATIONAL  TRADE  BALANCE 

"The  method  and  the  effect  of  the  creation  of 
these  huge  items  in  the  balance  slieet  of  nations 
are,"  we  are  reminded  by  Professor  Todd,  "of  a 
double  character.  When  in  the  first  place  a  loan 
is  raised  in  London,  say  for  the  construction  of  an 
Argentine  railway,  the  amount  of  the  loan  is  not 
exported  in  boxes  of  gold  to  the  borrowing  country. 
As  a  matter  of  fact,  the  bulk  of  the  money  never 
leaves  England,  but  is  simply  placed  to  the  credit 
of  the  foreign  government  or  company  in  the  books 
of  the  Bank  of  England,  from  which  it  is  almost 
immediately  paid  out  again  in  the  form  of  cheques 
to  the  engineers  or  bridge  builders  who  have  al- 
ready supplied  the  goods  for  which  the  loan  was 
intended  to  pay.  Thus  the  loan  is  given  in  the 
form  of  goods  which  appear  in  the  customs  returns 
of  the  exports  of  the  lending  country,  and  go  to 
swell  the  statistics  of  exports  for  that  year,  without 
any  corresponding  entry  of  imports  in  payment 
therefor.  There  is,  therefore,  for  the  time  being, 
an  apparent  excess  of  exports  by  the  lending  coun- 
try, and  a  corresponding  excess  of  imports  by  the 
borrowing  country.  But  in  subsequent  years  in- 
terest will  require  to  be  paid  on  the  loan,  and  at 
some  future  date  it  must  be  repaid  either  in  a  lump 
sum  or  by  installments  spread  over  a  period  of 
years,  and  this  repayment,  whether  of  interest  or 
capital,  can  only  be  made  in  the  form  of  goods. 
.  .  .  Thus  the  effect  upon  the  borrowing  country's 
balance  of  trade  is  to  create  in  the  year  that  the 
loan  is  raised,  an  apparent  excess  of  imports 
which  is  balanced  by  the  invisible  export  of  the 
debt  in  the  form  of  the  loan  certificates.  But 
in  future  years  the  borrowing  country's  exports 
must  be  in  excess  of  its  imports,  to  an  amount 
sufficient  to  meet  the  interest  charges  on  the  debt, 


THEORY  OF  THE  BALANCE  OF  TRADE  13 

which  thus  becomes  an  invisible  import  (of  in- 
terest coupons)  to  that  amount.  Again,  when 
the  loan  comes  to  be  repaid,  this  also  will  tend 
to  swell  the  exports  of  the  debtor  country  for  that 
year."  ^ 

So  far,  it  will  be  noted,  we  have  considered  in 
our  study  of  trade  balances  but  a  single  factor 
apart  from  trade  in  merchandise — namely,  that  of 
capital  investments  and  payment  of  interest  thereon. 
Were  it  possible  to  exclude  all  other  influences, 
the  balance  of  trade  would  be  determined  in 
accordance  with  the  foregoing  principles.  There 
are,  however,  several  other  important  factors  which 
must  be  taken  into  account,  and  which  will  receive 
detailed  consideration  elsewhere.  One  of  these, 
of  great  moment  to  Great  Britain  and,  probably,  in 
the  future,  to  the  United  States  as  well,  is  the  serv- 
ice of  ocean  transport  rendered  by  those  countries 
possessing  great  fleets  of  merchant  ships  to  those 
which  possess  little  or  no  shipping.  Another  class 
of  services  is  that  rendered  by  marine  and  other 
insurance  companies,  commission  merchants,  and 
the  elaborate  financial  system,  all  of  which  facili- 
tate the  handling  of  foreign  trade.  Another  factor, 
of  importance  to  certain  countries,  is  the  item  to 
which  the  term  "boarding  expenses"  is  aptly  ap- 
plied. This  includes  the  expenditure  of  tourists 
and  of  others  who  have  occasion  to  travel  or  live 
outside  of  their  own  country.     Among  other  in- 

'Todd.  "The  Mechanism  of  Exchange,"  p.  181. 


14    INTERNATIONAL  TRADE  BALANCE 

fluences  are  the  ebb  and  flow  of  immigrants,  the 
seasonal  and  temporary  migration  of  workers  from 
one  country  to  another,  and  remittances  by  immi- 
grants or  by  others. 

It  will  be  well  to  consider  briefly  the  gradual  evo- 
lution of  ideas  concerning  the  balance  of  trade.  It 
has  been  stated  that  during  the  seventeenth  cen- 
tury it  was  believed  generally  that  a  country  should 
maintain  an  excess  of  merchandise  exports  over 
imports,  to  the  end  that  its  stock  of  the  precious 
metals  should  be  maintained  if  not  augmented. 
An  adverse  balance,  an  excess  of  merchandise  im- 
ports, was  looked  upon  with  apprehension.  This 
attitude  rested  for  its  explanation,  on  the  impor- 
tance attached  to  the  precious  metals  by  the  early 
mercantilist  writers.  The  extraordinary  impor- 
tance attached  to  gold  and  silver  "was  perhaps 
justified,"  declares  Professor  William  Smart,  "in 
times  when  there  were  no  bankers;  when  Europe 
was  starving  for  a  sound  currency,  and  industry 
hampered  by  the  want  of  it.  All  countries  took 
strong  measures  to  attract  and  retain  gold  and 
silver;  even  Spain — the  depot  of  these  metals — 
prohibited  their  export  under  the  most  drastic  pen- 
alties. When  in  time  it  was  seen  that  such  mea- 
sures were  useless,  it  was  conceived  that  there  was 
a  more  natural  way  of  effecting  the  same  object; 
if  encouragement  were  given  to  exports  while  im- 
ports were  handicapped,  there  would  tend  to  be  a 
'favorable  balance' — that  is,  the  excess  of  value 
would  come  in  gold  and  silver;  hence  bounties  on 


THEORY  OF  THE  BALANCE  OF  TRADE  15 

exports  and  duties  on  imports."  ^  Referring  to  this 
policy,  Adam  Smith  stated  that  "the  attention  of 
Government  was  turned  away  from  guarding 
against  the  exportation  of  gold  and  silver  to  watch 
over  the  balance  of  trade  as  the  only  cause  which 
could  occasion  any  augmentation  or  diminution  of 
these  metals.  From  one  fruitless  care  it  was  turned 
away  to  another,  much  more  intricate,  much  more 
embarrassing,  and  just  equally  fruitless." 

The  mercantilist  view  of  the  balance  of  trade  has 
been  discarded  because  of  the  growing  recognition 
of  certain  fundamental  principles.  In  the  first 
place,  we  now  look  upon  gold  as  something  not  to 
be  consumed,  but  rather  as  a  thing  or  instrument 
for  facilitating  trade.  No  longer  do  we  think  of 
associating  the  prosperity  of  a  country  with  the 
per  capita  amount  of  gold  possessed  by  that  coun- 
try. In  the  second  place,  it  is  recognized  that 
"every  importation  when  it  takes  the  form  of  a 
regular  current,  necessarily  provokes  and  deter- 
mines a  corresponding  exportation,  and  con- 
versely." ^  This  law  of  the  balance  of  trade  oper- 
ates and  exerts  its  influence  in  the  first  instance 
through  the  variation  in  the  rate  of  foreign  ex- 
change and  in  the  long  run  through  its  effect  on 
general  prices.  We  have  here,  therefore,  two  auto- 
matic checks,  in  the  rate  of  exchange  and  general 
prices,  which,  under  normal  conditions,  will  pre- 
vent a  permanent  or  excessive  fiow  of  gold  either 

^  Smart,  "The  Return  to  Protection,"  p.  16. 
"Todd,  "The  Mechanism  of  Exchange,"  p.   132. 


16   INTERNATIONAL  TRADE  BALANCE 

into  or  out  of  a  country.  As  a  consequence  we  have 
come  to  see,  in  the  third  place,  that  total  exports 
and  total  imports  of  every  country  must  approxi- 
mately balance  each  other.  The  terms  "total  ex- 
ports" and  "total  imports"  are  used  advisedly. 
The  most  casual  examination  of  the  actual  customs 
returns  of  exports  and  imports  of  any  country  will 
reveal  the  fact  that  they  do  not  appear  to  bear  out 
this  law  at  all.  The  apparent  discrepancy  grows 
out  of  the  practice  of  including  among  exports  and 
imports  only  merchandise  goods,  and,  at  times, 
specie  and  bullion.  In  the  ordinary  statement  of 
foreign  trade  no  account  is  taken  of  the  export  and 
import  of  services,  of  capital,  interest,  boarding  ex- 
penses, etc.  In  the  interest  of  clearness,  therefore, 
let  us  refer  to  these  items  as  invisible  exports  and 
imports,  as  Sir  Robert  Giffen  first  called  them.  The 
term  visible  may  quite  naturally  be  applied  to  mer- 
chandise exports  and  imports.  Now,  although  mer- 
chandise, or  visible,  exports  and  imports  are  not 
likely  to  balance  for  any  country,  we  may  none  the 
less  rest  assured  of  an  approximate  equivalence  be- 
tween the  total  (including  both  visible  and  invis- 
ible) exports  and  total  (both  visible  and  invisible) 
imports.  Under  normal  conditions  this  must  in- 
evitably be  the  case,  on  account  of  the  operation 
of  the  automatic  checks  mentioned  above. 

Recognizing  the  danger  of  confusion  that  may 
attend  the  use  of  the  terms  "exports"  and  "im- 
ports" in  this  study  of  trade  balances,  and  believ- 
ing that  the  possibility  of  such  confusion  will  be 


THEORY  OF  THE  BALANCE  OF  TRADE  17 

reduced  through  the  use  of  the  terms  "credits"  and 
"debits"  the  writer  has  in  large  part  adopted  the 
latter  terms  where  ambiguity  might  otherwise  arise. 
It  is  obvious,  of  course,  that  the  reader,  if  he  so 
wishes,  may  readily  substitute  the  terms  exports 
and  imports  as  occasion  demands  in  this  and  subse- 
quent chapters. 

It  is  perhaps  scarcely  necessary  to  emphasize  the 
fact  that  both  the  visible  and  invisible  factors  alike 
have  an  effect  upon  the  foreign  exchange  rate.  An 
overseas  investment  of  |500,000,000  of  capital  in 
the  course  of  a  year  would  exert  the  same  influence 
upon  the  foreign  exchange  situation  as  that  im- 
parted by  the  importation  of  |500,000,000  worth  of 
foreign  goods.  This  general  truth  has  been  well 
put  by  Mr.  Hartley  Withers.  In  his  explanation 
of  the  variation  in  the  price  of  sterling  exchange, 
he  states  that 

"the  only  reason  why  anyone  in  New  York  should 
want  to  buy  pounds  in  London  is  because  he  has 
payments  to  make  on  this  side.  He  has  money  in 
hand  in  New  York,  but  of  course  it  is  all  in  dollars, 
and  he  has  to  pay  a  debt  in  England,  and  in  order 
to  do  so  he  must  buy  pounds  in  England  with  his 
dollars  in  New  York,  because  his  English  creditor 
will,  naturally,  take  payment  only  in  pounds.  The 
reasons  why  he  may  have  to  pay  a  debt  in  England 
are  manifold.  He  may  be  the  New  York  banker 
to  a  great  American  railroad  which  has  a  large 
number  of  its  bonds  or  shares  held  in  England,  and 
has  to  remit  hither  to  pay  interest  or  dividends ;  or 
he  may  be  an  importer  of  English  goods  which  he 


18    INTERNATIONAL  TRADE  BALANCE 

sells  in  America  and  pays  for  in  England,  or  he 
may  be  the  American  father  of  an  English  duchess 
who  has  to  remit  her  dowry,  or  he  may  be  an  Irish 
peasant,  working  and  earning  wages  in  America 
and  sending  home  money  to  his  father  to  help  him 
to  pay  his  rent.  All  the  hundreds  of  reasons  which 
make  Americans  pay  money  to  England  make  them 
want  to  buy  English  money  in  New  York  with 
American  dollars."  ^ 

The  statement  above  will  be  recalled  that  an 
equivalence  of  exports  with  imports  does  not  in  it- 
self constitute  an  essential  condition  of  stable 
trade,  but  that  national  commercial  solvency  rests 
instead  upon  an  equivalence  between  payments  by 
and  to  a  country.  There  is  a  great  difference  gen- 
erally between  the  balance  of  merchandise  trade  of 
any  country  and  its  balance  of  total  indebtedness. 
In  seeking  to  estimate  a  country's  commercial  posi- 
tion, therefore,  attention  must  be  directed  to  the 
balance  of  indebtedness;  and  obviously  this  in- 
volves in  reality  nothing  else  than  an  investiga- 
tion of  the  debtor  and  creditor  account  of  the 
country.  The  principal  factors  that  appear  in  the 
international  balance  sheet  have  already  been  enu- 
merated. Their  position  in  the  balance  sheet 
may  be  briefly  indicated.  Prominent  among  the 
debit  items  against  a  country's  account  are  mer- 
chandise imports,  the  interest  and  dividends  owed 
abroad  to  foreign  lenders  of  capital,  its  own  capital 
which  may  be  undergoing  export  for  investment 

*  Withers,  "War  and  Lombard  Street,"  p.  41. 


THEORY  OF  THE  BALANCE  OF  TRADE  19 

abroad,  freight  charges  due  to  foreign  shipping 
companies,  commissions  to  foreign  banking  and  in- 
surance companies  for  services  rendered,  and  re- 
mittances and  other  payments  which  may  be  made 
abroad  by  immigrants  and  other  residents  within 
the  country.  Among  the  credits  the  principal  ele- 
ments are  merchandise  exports,  the  receipt  from 
abroad  of  interest  and  dividends  on  capital  already 
loaned  and  invested  in  other  countries,  the  impor- 
tation of  foreign  capital  for  investment  within  the 
country,  the  freight  earnings  of  domestic  ships,  the 
commissions  received  by  financial  companies  for 
services  rendered  abroad,  and  other  miscellaneous 
payments  due  from  other  nations  for  a  variety  of 
reasons. 

It  will  be  well,  perhaps,  to  offer  a  further  word 
of  explanation  concerning  the  significance  of  loans 
of  capital  by  one  country  to  another.  "The  con- 
tracting of  a  loan  by  a  nation  makes  the  nations 
which  offer  the  loan  its  debtors,"  Bastable  states,^ 
"for  the  time  being,  till  the  loan  is  carried  out,  and 
it  necessarily  becomes  their  creditor.  To  take  the 
most  usual  instance,  investments  of  capital  abroad, 
while  being  carried  on,  make  a  country  a  debtor, 
as  the  investment  of  foreign  capital  in  a  country 
makes  it  a  creditor."  The  interest  payable  upon 
such  capital,  however,  after  it  has  been  invested, 
has  naturally  an  effect  in  the  opposite  direction. 
In  this  case,  the  lending  or  investing  countiy  is  a 
creditor,  while  the  country  which  has  the  interest 

^  Bastable,  "Theory  of  International  Trade,"  p.  74. 


'7 


20   INTERNATIONAL  TRADE  BALANCE 

charges  to  meet  is  a  debtor.  In  the  repayment  of  a 
loan  previously  incurred  we  find  the  effect  to  be 
similar  to  that  attending  the  payment  of  interest 
on  a  loan  outstanding.  It  is  placed  to  the  credit  of 
the  receiving  country,  and  to  the  debit  of  the  one 
repaying. 

,  For  support  of  the  contention,  already  pro- 
pounded, that  the  equivalence  of  merchandise  ex- 
ports and  imports  is  not  essential  to  commercial 
solvency,  let  us  turn  to  the  well-known  fact  that 
trade  prosperity  quite  impartially  may  attend  an 
excess  of  exports  over  imports  or  the  reverse  con- 
dition. The  prosperity  of  the  United  States  during 
the  three  decades  preceding  the  World  War  is  no 
more  to  be  attributed  to  the  excess  of  exports  which 
characterized  the  American  trade  balance,  than  is 
British  prosperity  during  the  same  period  to  be  ex- 
plained on  the  ground  of  an  excess  of  imports. 
Moreover,  a  country's  trade  balance  may  undergo 
change  in  the  course  of  time  without  affecting  the 
commercial  prosperity  of  the  country.  But  the 
same  is  not  the  case  with  the  balance  of  total  in- 
debtedness. A  country  which  has  against  it  a  net 
balance  of  indebtedness  must  effect  a  modification 
of  some  of  the  elements  in  its  international  account, 
or  suffer  commercial  losses. 

Inasmuch  as  merchandise  exports  and  imports, 
in  general,  are  the  items  most  easily  altered  or  the 
most  susceptible  to  change,  a  readjustment,  there- 
fore, will  normally  take  effect  through  them.  An 
unfavorable  balance  will,  in  the  course  of  time,  be 


THEORY  OF  THE  BALANCE  OF  TRADE  21 

discharged,  through  the  intervention  of  the  for- 
eign exchange  rate  and  general  prices,  in  the  form 
of  reduced  imports,  increased  exports,  or  a  com- 
bination of  both.  The  change  which  occurred  about 
1874  in  the  merchandise  trade  balance  of  the  United 
States  will  sei*ye  to  illustrate  this  principle.  The 
excess  of  imports  which  normally  marked  American 
trade  prior  to  1874  was  a  natural  resultant  ac- 
companiment of  the  heavy  importation  of  foreign 
capital  for  investment  in  the  United  States.  About 
that  time,  however,  the  annual  interest  and  divi- 
dend charges  payable  to  foreign  lenders  on  earlier 
loans  began  to  surpass  in  volume  the  new  capital 
which  entered  the  country.  This  prospective  bal- 
ance of  payments  against  the  United  States  was 
met  by  the  readjustment  in  the  trade  balance  to 
which  reference  has  been  made.  From  that  time 
onward  American  trade  was  marked  by  an  excess 
of  exports,  a  growing  excess  which  approximately 
reflected  and  kept  pace  with  the  increasing  balance 
of  invisible  debits  against  the  country. 

A  further  example  of  the  relation  between  for- 
eign borrowing  operations  and  the  trade  balance 
may  be  taken  from  the  experience  of  the  Argentine. 
An  overturn  occurred  in  1891  in  the  trade  balance 
of  that  country,  when  an  excess  of  imports  over 
exports,  which  till  then  had  been  the  normal  con- 
dition of  things,  was  changed  into  an  excess  of  ex- 
ports over  imports,  a  condition  which  has  marked 
the  trade  of  that  country  ever  since.  In  the  chart 
which  follows  there  is  depicted  the  relationship  be- 


22    INTERNATIONAL  TRADE  BALANCE 

tween  the  Argentine  trade  balance  and  the  volume 
of  foreign  loans  contracted  by  that  country  dur- 


Balance   of   Trade   ajstd    Balance   of    Borrowings,    1881-1900 
(Argentina)  ^ 
+  220 

+  200 

+  180 

+  160 
+  140 
+  120 
+  100 
+  80 
+    60 

3  +  40 

o 

CO  +  20 
o 

£3    0 

Q- 

I  -  20 
d  -  40 

-  60 

-  80 

-100 

-120 

-140 

-160 

-180 

-200 

-220 

1881         1885  1890  1895  1900 


A 

/\ 

BORROWINGS 

EXPORTS 

EXCEED 
INTEREST 

/\ 

EXCEED 
IMPORTS 

Vy 

^^ 

i^y  ^^-^ 

IMPORTS 

^ 

INTEREST 

EXCEED 

EXCEEDS 

EXPORTS 

BORROWINGS 

BALANCE  OF  TRAHF 

BALANCE  OF  BORROWINGS 

ing  the  last  two  decades  of  the  nineteenth  century. 
The  balance  of  borrowings  represents  the  differ- 
ence  between   the  volume  of  foreign  capital  in- 

'  Williams,  "Argentine  International  Trade  under  Inconvertible 
Paper  Money,  1880-1900,"  p.  186. 


THEORY  OF  THE  BALANCE  OF  TRADE    23 

vested  annually  in  Argentina  and  the  interest 
charges  annually  payable  by  that  country  to  foreign 
lenders  of  capital.  The  trade  balance  represents 
exports  minus  imports. 

It  will  be  noted  from  the  above  chart  that  prior 
to  1890  the  new  annual  loans  from  abroad  ex- 
ceeded the  annual  interest  charges.  During  that 
period  merchandise  imports  exceeded  the  exports. 
Since  1890,  the  case  has  been  reversed.  It  is  of  in- 
terest to  note  that  the  transition  in  the  balance 
of  borrowings  occurred  in  1890,  followed  a  year 
later  by  the  overturn  in  the  balance  of  trade.  In 
the  main,  the  changes  in  the  balance  of  borrowings 
are  followed  very  shortly  by  changes  in  the  con- 
trary direction  in  the  trade  balance. 

It  is,  of  course,  true  that  the  inconvenience  of  a 
sudden  change  in  prices  with  its  attendant  disturb- 
ance of  the  merchandise  trade  balance  may  be  ob- 
viated by  a  foreign  loan.  Such  a  loan  will  serve, 
for  the  time,  to  maintain  the  equation  of  indebted- 
ness. Obviously,  however,  no  nation  can  continue 
permanently  to  meet  its  foreign  obligations  and 
discharge  the  annual  payments  accruing  against 
it  by  the  process  of  incurring  new  debts.  Eventu- 
ally, it  has  been  pointed  out  already,  the  interest 
charges  would  come  to  exceed  the  new  capital  an- 
nually borrowed. 

Having  noted  that  an  equivalence  of  merchandise 
exports  and  imports  is  unessential,  if  not  indeed 
generally  non-existent,  let  us  return  to  the  conten- 
tion that  an  equivalence  between  total  credits  and 


24   INTERNATIONAL  TRADE  BALANCE 

total  debits,  for  each  country,  must  always,  under 
normal  conditions,  be  approximated.  The  equation 
of  indebtedness  is  the  position  toward  which  in- 
ternational trade  always  moves.  That  this  is  so 
was  attributed  above  to  the  action  of  two  so- 
called  automatic  forces — the  foreign  exchange  rate, 
and  international  price  levels.  To  be  sure,  there 
are  certain  conscious  correctives  which  may  be 
deliberately  employed  to  correct  the  course  of  com- 
merce and  the  exchanges,  such  as  increasing  or  de- 
creasing exports  or  imports,  refonning  the  cur- 
rency system,  and  varying  the  bank  discount  rate. 
While  these  methods  are  effectively  employed  on 
occasion,  the  fact  remains  that  the  foreign  ex- 
changes and  general  prices  contain  within  them- 
selves a  force  which  always  tends  to  preserve  equi- 
librium between  the  total  payments  to  and  from 
any  country. 

The  mechanism  of  the  foreign  exchanges  is  de- 
vised to  facilitate  trade  and  financial  transactions 
between  nations.  It  seeks  through  the  use  of 
credit  instruments  and  by  the  practice  of  offsetting 
claims  and  counter-claims  to  enable  countries  the 
more  readily  to  discharge  their  mutual  obligations. 
''The  fluctuations  which  actually  take  place  in  the 
foreign  exchanges  are  at  once  the  necessai'y  result 
and  tlie  certain  index  of  the  inequalities  which 
exist  in  the  indebtedness  of  different  countries — 
inequalities  either  in  the  amount  of  their  liabilities, 
or  in  the  time  within  which  payment  must  be  made, 
or  in  the  relation  of  the  currency  of  one  countiy  to 


THEORY  OF  THE  BALANCE  OF  TRADE  25 

that  of  another."  ^  Under  normal  conditions  the 
primary  cause  of  variations  in  the  rate  of  exchange 
lies  in  the  comparative  amount  of  foreign  indebted- 
ness. In  tliose  cases,  however,  where  an  incon- 
vertible paper  circulation  exists,  the  most  impor- 
tant cause  is  found  in  the  nature  of  the  currencies. 

In  the  event  of  divergence  from  equilibrium  be- 
tween the  total  credits  and  total  debits  of  any 
country  the  foreign  exchange  rate  would  at  once 
reflect  the  fact.  Thus  if  merchandise  imports,  or 
any  other  debit  item  in  the  account,  were  to  in- 
crease excessively  the  rate  would  rise.  With  this 
increase  of  the  rate  above  par,  importers  in  that 
country  would  at  once  face  the  necessity  of  paying 
more  for  goods  imported  from  abroad.  The  rise  in 
the  rate  would,  therefore,  tend  to  discourage  im- 
ports. Obviously,  too,  exports  would  be  encour- 
aged. Quite  possibly,  however,  this  factor  would 
not  be  sufficient  to  check  the  excessive  buying  from 
abroad  and  thus  bring  the  rate  back  toward  par. 
In  this  event,  the  rate  would  continue  to  rise  until 
it  reached  the  upper  gold  or  specie  point.  It  is  at 
this  juncture  that  the  second  automatic  check  would 
begin  to  function.  The  specie  point  having  been 
reached,  gold  shipments  would  begin  to  be  moved 
from  the  importing  country. 

For  the  purpose  of  illustration,  let  us  assume  that 
the  United  States  and  Canada  are  entirely  cut  off 
from  commercial  relations  with  other  countries 
and  that  Canada,  typifying  our  importing  country 

^  Goschen,  "Theory  of  Foreign  Exchanges,"  pp.  4,  5. 


26   INTERNATIONAL  TRADE  BALANCE 

above,  is  buying  heavily  in  the  American  market. 
Let  us  assume  further  that  the  Canadian  people, 
disregarding  the  handicap  of  a  heightened  ex- 
change rate,  persist  in  their  importation  of  Amer- 
ican goods,  that  the  rate  of  exchange  on  New  York 
is  forced  up  to  the  specie  point,  and  that,  in  con- 
sequence, a  large  quantity  of  gold  is  shipped  from 
Montreal  to  New  York.  At  once  Montreal  bankers, 
finding  their  gold  reserves  reduced,  would  restrict 
credit  by  calling  loans  and  granting  new  ones  more 
reluctantly.  New  York  banks,  on  the  contrary, 
would  be  encouraged  to  enlarge  their  loans  on  ac- 
count of  their  increased  gold  reserves.  If  this  were 
continued,  that  is  to  say,  if  the  Canadian  people 
should  still  persist  in  buying  excessively  in  the 
American  market,  the  effect  would  soon  be  country- 
wide; in  the  United  States  there  would  be  an  in- 
crease in  the  volume  of  money  and  credit,  in  Canada 
a  restriction  of  the  same.  The  general  price  level 
in  Canada  would  therefore  fall,  while  in  the  United 
States  it  would  rise.  Obviously,  as  a  result  of  these 
changes,  Canada  would  now  be  a  profitable  country 
from  which  to  buy  and  an  unprofitable  country  to 
which  to  export.  By  the  same  token,  a  continuation 
of  Canadian  buying  in  the  American  market  would 
be  attended  by  increasingly  ruinous  results.  Auto- 
matically, Canadian  imports  would  be  checked  and 
exports  stimulated,  and  the  reverse  movement  back 
toward  equilibrium  would  be  initiated.  The  per- 
sistent tendency  toward  equivalence  of  payments 
to  and  by  a  country  is,  under  normal  conditions, 


THEORY  OF  THE  BALANCE  OF  TRADE  27 

based,  therefore,  in  the  first  instance  on  the  fluc- 
tuations of  the  rate  of  exchange  and  ultimately,  if 
need  be,  on  the  readjustment  of  prices  attendant 
upon  the  shipment  of  gold. 

We  are  reminded  by  Professor  Taussig  that  "a 
comparatively  slight  disturbance  of  international 
payments  leads  to  a  flow  of  specie,  and  sets  in  mo- 
tion a  train  of  forces,  either  in  the  money  market 
in  the  narrower  sense  or  in  the  general  price  mar 
ket,  which  tend  to  check  the  flow  of  specie  and 
bring  about  a  new  equilibrium."  ^  In  other  words, 
so  long  as  we  have  the  free  international  move- 
ment of  gold  and  noi*mal  conditions  of  trade,  a  rise 
in  the  exchange  rate  may  be  looked  upon  as  a  par- 
tial closing  of  the  door  through  which  imports  flow 
in  and  a  wider  open  door  through  which  exports 
flow  out.  A  fall  in  the  rate  would  have  the  con- 
trary effect.  The  flow  of  gold,  under  normal  con- 
ditions, gives  rise  to  its  own  automatic  limitation. 

That  exchange  rates  normally  move  in  sympathy 
with  changes  in  the  export  and  import  trade  is,  of 
course,  a  commonplace.  For  example,  in  a  normal 
year  sterling  exchange  rates  in  New  York  move 
downward  toward  the  gold  import  point  in  the 
autumn,  in  response  to  the  heavier  American  ex- 
ports of  that  season  of  the  year.  During  the  spring 
and  early  summer  sterling  rates  in  New  York,  on 
the  contrary,  rise  above  par  and  move  toward  the 
gold  export  point,  owing  to  the  fact  that  the  pre- 

*  Taussig,  "International  Trade  under  Depreciated  Paper,"  Quar- 
terly Journal  of  Economics,  May,  1917. 


28 


INTERNATIONAL  TRADE  BALANCE 


vious  season's  crop  exports  have  been  paid  for,  and 
the  current  crops  have  not  yet  been  harvested.  In 
the  chart  which  follows  there  appear  the  results, 
averaged  for  a  typical  year,  of  a  study  of  monthly 
averages  of  sterling  sight  rates  in  New  York,  from 
1889  to  1919. 

COMPAKISON   OF   SEASONAL   VARIATION    FOR   EXPORTS   OF   MERCHAN- 
DISE    AND     FOR     THE     RaTE     FOR     BaNKERS' 

Sight  Bills  on  London  ^ 


130 


120 


110 


100 


90 


80 


70 


.^EXPORTS 
.^-EXCHANGE  RATE 

/ 

^ 

A 

K 

/ 

>- — < 

.-'• 

~-« 

V 

\ 
\ 

/ 

\ 

\/ 

>-< 

V 

\ 

f 

/ 

\ 

1 

^ 

\ 

s 

\     1 

/ 
/ 

\ 

N 

k 

/ 

/  \ 

\ 
\ 

( 

>- — ( 

1 

1 

N 

/ 

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1 

^—^ 

/ 

/ 

/ 

< 

100.15 


100.10 


100.05 


100.00 


99.95  ui 

_i 

u 

Vi 

99.90 
99.85 


Jan.    Feb.    Mar.    Apr.    May    June    July    Aug.   Sept.  Oct.     Nov.   Dec.    Jan. 

Certain  of  the  conclusions  which  appear  from 
the  investigation,  the  results  of  which  are  em- 
bodied in  the  foregoing  chart,  are  obvious  at  once. 
During  the  thirty  years  under  review,  the  sterling 
rate  was  subject,  on  the  average,  to  a  seasonal  in- 
crease from  January  to  June.  From  the  high  point 
attained  in  that  month  the  rate  fell  sharply  to 
September,  slowly  receding  further  to  its  low  point 

^  Bullock,  Williams,  and  Tucker,  "The  Balance  of  Trade  of  the 
United  States,"  Tlie  Review  of  Economic  Statistics,  July,  1919, 
p.  240. 


THEORY  OF  THE  BALANCE  OF  TRADE  29 

reached  in  October,  after  which  it  gradually  moved 
upward  again.  Moreover,  there  was  a  remarkably 
close  inverse  relation  between  the  seasonal  varia- 
tion of  exports  and  that  of  the  exchange  rate,  the 
latter  rising  and  falling  as  the  former  diminished 
and  increased. 

The  foregoing  statement  of  the  forces  which  tend 
to  maintain  an  equilibrium  between  international 
payments  is  applicable  under  normal  conditions. 
It  cannot,  however,  explain  the  situation  which  has 
arisen  as  a  result  of  the  war.  Thus,  in  August, 
1914,  demand  sterling  was  quoted  in  New  York  at 
|6,  and  cables  at  |7  per  £.  Since  that  time  it  has 
fallen  as  low  as  |3.19.  The  French  franc,  with  a 
par  value  of  19.3  cents,  was  worth  33  cents  in  New 
York  in  August,  1914,  and  since  that  time  has  fallen 
to  less  than  6  cents.  The  Canadian  dollar  has  had 
as  low  a  value  as  82  cents  in  the  New  York  market, 
while  the  German  mark,  with  a  par  value  of  23.8 
cents,  has  already  touched,  in  its  downward  course, 
approximately  1  cent.^  These  wide  variations  have 
resulted  from  the  practical  suspension  of  free  gold 
shipments  between  countries.  The  effect  has  been 
to  remove,  for  the  time,  the  old  limits  on  the  pos- 
sible variation  of  the  exchange  rates.  The  gold 
points  have  ceased  to  function. 

Under  normal  conditions,  as  is  well  known,  the 
limit  to  exchange  fluctuations,  in  either  direction, 
is  determined  by  the  cost  of  transporting  specie. 
The  normal  upper  limit  is  par,  plus  the  cost  of 

»In  June,  1921. 


30    INTERNATIONAL  TRADE  BALANCE 

shipping  gold  out  of  the  country,  the  usual  lower 
limit  par,  minus  the  cost  of  shipping  gold  into  the 
country.  Exchange  cannot  normally  depart  far- 
ther from  par,  for  the  reason  that  with  the  rate 
at  the  specie  point  it  becomes  cheaper  to  make  or 
receive  payment  in  gold,  including  the  costs  inci- 
dental to  transportation,  than  by  bills  of  exchange. 
The  total  nonnal  fluctuation,  therefore,  in  the  ex- 
changes between  any  two  countries  is  measured  by 
twice  the  cost  of  transporting  specie.  Although,  in 
general,  the  value  of  international  bills  can  vary 
only  within  these  narrow  limits  set  by  the  gold 
points,  there  are  certain  exceptional  temporary 
deviations  from  the  rule.  If  a  favorable  exchange 
be  attended  by  a  stringency  in  the  domestic  money- 
market,  the  rate  may  fall  below  the  lower  specie 
point.  In  such  a  case,  the  exchange  rate,  already 
depressed  by  the  assumed  favorable  balance  of 
credits  over  debits,  would  fall  still  further,  owing 
to  the  restricted  ability  or  willingiiess  of  money 
dealers  to  purchase  foreign  bills  at  a  time  of 
"tight"  money.  Thus  on  December  7,  1903,  sight 
sterling  bills  fell  in  New  York  to  so  low  a  point  as 
$4.8275,  notwithstanding  the  fact  that  the  normal 
lower  gold  shipping  point  is  about  14.845.  Like- 
wise, there  are  circumstances  under  which  the  ex- 
changes may  rise  for  brief  periods  above  the  upper 
point.  Such  a  condition  would  arise  in  the  event 
of  heavy  imports  and  the  prospect  of  a  large  de- 
mand for  gold  shipments  out  of  the  country  occur- 
ring simultaneously  with  reduced  domestic  gold 


THEORY  OF  THE  BALANCE  OF  TRADE  31 

reserves.  The  rate  for  sight  sterling  in  New  York, 
for  example,  rose  during  1896,  to  |4.91  per  pound, 
although  the  normal  upper  gold  point  is  but  |4.885. 
At  that  time  an  important  banking  syndicate  in 
New  York  sought  to  safeguard  the  gold  reserves  in 
the  United  States  Treasury.^ 

Since  1914,  however,  conditions  have  not  been 
normal.  The  "dislocated  exchanges"  are  the  out- 
come, as  already  intimated,  of  the  cessation  of 
operation  of  the  gold  points  which,  in  turn,  is  the 
result  of  deranged  trade  balances,  the  drain  of  gold 
from  Europe,  the  gold  embargoes,  and  the  excessive 
issues  of  paper  money. 

The  general  effect  upon  the  foreign  exchanges  of 
government  restrictions  upon  the  export  of  gold 
may  be  revealed  by  an  example.  After  the  entry 
of  the  United  States  into  the  war,  in  April,  1917, 
the  American  dollar  suffered  an  extraordinary  de- 
preciation in  certain  of  the  neutral  countries,  while 
continuing  to  stand  at  a  high  premium  in  the  bel- 
ligerent countries.  The  explanation  of  the  changes 
in  both  groups  of  rates  is  fundamentally  the  same, 
and  is  to  be  found  chiefly  in  the  gold  embargoes.  In 
the  belligerent  countries,  the  dollar  went  to  a 
premium  because  the  balance  of  payments  due  the 
United  States  on  account  of  goods  purchased  in 
that  country  was  so  enormous  that  the  embargoes 
placed  by  the  European  belligerents  on  the  export 
of  gold  made  their  task  of  meeting  the  American 
payments  more  impossible  than  ever.    On  the  other 

^Whitaker,  "Foreign  Exchange,"  p.  519. 


32   INTERNATIONAL  TRADE  BALANCE 

hand,  the  dollar  went  to  a  discount  in  various  neu- 
tral countries,  notably  Sweden,  the  Netherlands, 
and  Argentina,  on  account  of  the  fact  that  the 
United  States,  while  importing  heavily  from  those 
countries,  was  unwilling  to  deplete  its  gold  reserves 
and  for  that  reason  was  unwilling  to  export  the 
gold  necessary  to  restore  the  unfavorable  balances. 
It  would  appear  that  Goschen's  contention,  al- 
ready cited,  is  peculiarly  applicable  to  the  present 
condition  of  the  exchanges.  The  fundamental  cause 
of  the  extreme  deviation  from  par  probably  lies  in 
the  nature  of  the  currencies,  particularly  of  the 
European  countries.  Gold  has  largely  disappeared 
from  the  channels  of  trade  in  Europe  and  in  its 
stead  we  find  a  bewildering  array  of  paper  curren- 
cies, issued  in  so  large  a  volume  that  many  of  them 
lack  even  a  semblance  of  stability  of  value.  It  has 
been  estimated  by  Dr.  O.  P.  Austin  that  the  paper 
circulation  of  the  fifty  principal  countries  of  the 
world,  with  a  value  in  July,  1914,  of  |7,500,000,000, 
had  been  increased  by  November,  1920,  to  a  value 
( on  a  pre-war  or  normal  basis )  of  |81, 000,000,000.^ 
In  this  estimate  no  account  is  taken  of  the  vast  is- 
sues of  Bolshevik  currency.  With  the  enormous 
increase  in  paper  issues  and  the  reduction  in  the 
production  of  gold,  the  ratio  of  gold  to  notes  has 
naturally  fallen.  It  was  estimated  that  for  the 
countries  in  question  the  ratio  declined  from  66.8 
per  cent  in  July,  1914,  to  9.3  per  cent  in  November, 

^  Austin,   "World   Debts   and   Paper   Currency,"   The  Americas, 
November,  1920. 


THEORY  OF  THE  BALANCE  OF  TRADE  33 

1920.  Naturally,  in  many  countries  the  showing  is 
much  less  favorable  than  this  average  condition. 
In  the  case  of  Austria-Hungary  the  ratio  of  gold 
to  notes  declined  from  54  per  cent  in  1914  to  4/10 
of  1  per  cent  in  November,  1920. 

The  old  or  normal  parities  of  exchange  were 
stated  in  tenns  of  gold,  or,  with  respect  to  coun- 
tries not  entirely  on  the  gold  basis,  upon  a  rea- 
sonably fixed  and  standardized  basis  of  currency. 
With  the  present  inflation  of  the  currencies  the 
old  parities  do  not  apply,  and  rates  are  at  a  dis- 
count approximating  the  discount  of  the  curren- 
cies from  gold.  Under  the  circumstances  the  price 
of  foreign  exchange  is  a  fairly  sensitive  indication 
of  the  state  of  depreciation  of  the  paper  money. 
This,  of  course,  does  not  mean  that  the  ordinary 
items  in  the  interaational  trade  account,  such  as 
exports,  imports,  interest  and  shipping  charges, 
etc.,  are  to  be  disregarded.  Their  influence  still  is 
felt,  although  for  the  time  greatly  overshadowed  by 
the  disturbing  effects  of  depreciated  paper  cur- 
rencies. While  exchange  rates  normally  register 
changes  in  the  currents  of  international  payments, 
they  also,  to  some  extent,  and  especially  during 
such  abnormal  periods  as  the  present,  register  the 
value  of  a  nation's  currency,  inasmuch  as  they 
present  an  effective  comparison  with  foreign  gold 
monies.  Thus,  quite  irrespective  "of  whatever 
actual  business  may  be  going  on,  no  one  would  be 
willing  to  exchange  two  Canadian  dollars,  which 
will  buy  a  bushel   of  Manitoba  wheat,   for  four 


34    INTERNATIONAL  TRADE  BALANCE 

rubles  [approximately  the  pre-war  or  normal 
equivalent  of  two  Canadian  dollars],  which  will  not 
buy  a  Russian  newspaper." 

The  foreign  exchanges,  in  the  presence  of  depre- 
ciated paper  money,  are  accordingly  subject  to  two 
sets  of  influences — the  normal  one,  growing  out  of 
the  settlement  of  the  balance  of  foreign  indebted- 
ness, and  the  depreciation  of  the  paper  currency. 
Inasmuch  as  British  paper  is  subject  to  a  depreci- 
ation of  approximately  20  to  25  per  cent  (June 
1921)  while  that  of  the  United  States  has  been 
maintained  at  its  old  parity  with  gold,  it  follows 
that  a  bill  of  exchange  on  New  York,  which  repre- 
sents to  the  London  market  the  approximate  equiva- 
lent of  gold,  would  sell  in  London  at  a  price  de- 
termined mainly  by  the  price  of  gold  in  British 
paper.  However,  the  relation  of  imports  to  ex- 
ports is  not  without  its  influence  upon  the  gold 
premium.  When,  under  conditions  of  depreciated 
paper,  the  price  of  foreign  exchange  falls  or  rises, 
in  response  to  trade  influences,  the  premium  on 
gold  moves  in  the  same  direction  owing  to  the  ef- 
fect of  possible  gold  shipments. 

On  the  other  hand,  the  depreciation  of  paper, 
followed  by  a  depreciation  of  exchange,  has  a  recip- 
rocal influence  upon  the  course  of  foreign  trade, 
or  the  relation  of  imports  to  exports.  The  opinion 
often  maintained  that  a  depreciated  paper  currency 
always  serves  as  an  incentive  to  exports  and  a 
check  on  imports  is  not  in  accord  with  facts.  For 
example,  the  exporter,  it  is  said,  of  the  country 


THEORY  OF  THE  BALANCE  OF  TRADE  35 

whose  exchange  is  depreciated,  receives  payment 
for  his  goods  in  the  form  of  a  foreign  bill  of  ex- 
change calling  for  foreign  gold.  This  he  sells  to 
advantage  in  his  own  country  for  a  larger  quantity 
of  the  domestic  (depreciated)  money. 

The  case,  however,  is  not  so  simple.  In  the 
country  with  depreciated  paper,  the  specie  premium 
may  be  higher  or  lower  than  the  level  of  prices. 
When  higher  than  prices,  exports  are  stimulated, 
inasmuch  as  the  foreign  (gold)  bill  of  exchange 
yields  to  the  exporter  more  of  his  domestic  paper 
money.  When  the  specie  premium,  however,  is 
lower  than  the  range  of  prices,  it  discourages  ex- 
ports and  stimulates  imports,  since  the  exporter's 
goods  are  now  worth  relatively  less  abroad  than 
at  home  and  the  importer  finds  it  easier  to  pay  for 
the  foreign  goods.  This  influence  "depends  on  the 
divergence  between  the  gold  premium  and  the  real 
depreciation  of  the  paper,  which  may  be  in  either 
direction." 

A  notable  example  of  this  truth  may  be  found  in 
the  conditions  which  prevailed  throughout  a  large 
part  of  Europe  during  the  years  1917-20.  It  ap- 
pears that  the  rise  of  prices,  in  the  local  cun*en- 
cies,  in  those  countries  did  not  by  any  means  coin- 
cide with  the  depreciation  of  the  exchanges,  or, 
what  was  substantially  the  same  thing,  the  pre- 
mium on  gold.^     Instead,  the  price  increase  at  one 

*  It  has  already  been  suggested  that  the  depreciation  of  the 
exchange  in  a  country  with  depreciated  paper  would  indicate 
substantially  the  price  of  gold  in  the  local  currency. 


36 


INTERNATIONAL  TRADE  BALANCE 


time  exceeded  the  fall  in  the  exchanges,  while  at  an- 
other time  the  reverse  was  true.  And  naturally 
the  effect  upon  exports  and  imports  was  not  uni- 
form during  the  two  periods.  In  England,  France, 
and  Italy  throughout  1917,  1918,  and  the  early 
part  of  1919,  exchange  on  the  United  States  had 

The  Purchasing  Power  Parity  of  the  British  Pound  and  the 

Depreciation  from  Par  Value  of  the  British 

Pound   in   New   York   Exchange 


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/ 

V   ^^ 

^ 

1918 


1919 


1920 


1921 


risen  less  than  prices.^  Conditions  were  reversed 
during  the  latter  part  of  1919  and  throughout  1920. 
During  the  earlier  period  imports  from  the  United 
States  to  these  countries  were  favored.  During 
the  later  period  imports  from  Europe  into  the 
United  States  were  favored.  This  general  reason- 
ing will  be  made  more  clear  by  the  diagram  which 
follows.     The  internal  value  of  the  British  pound, 

*  The  Monthly  Review,  The  Federal  Reserve  Bank  of  New  York, 
May,  1921,  p.  5. 


THEORY  OF  THE  BALANCE  OF  TRADE  37 

as  expressed  in  its  domestic  purchasing  power,  is 
contrasted  with  its  external  value,  as  revealed  in 
the  New  York  exchange  rate.  The  divergence  be- 
tween the  two  measures  the  stimulus  to  exports  or 
imports  as  the  case  may  be. 

Under  normal  conditions  the  two  curves  would 
tend  to  move  in  the  same  general  direction,  though 
not  necessarily  together.  The  wide  disparity  be- 
tween the  two  lines  prior  to  March,  1919,  is  ex- 
plained by  the  fact  that  British  exchange  was 
"pegged,"  or  arbitrarily  fixed,  from  October,  1915, 
to  March,  1919.  As  a  consequence,  during  that 
period  paper  prices  in  Britain  rose  faster  (i.  e., 
purchasing  power  of  the  British  currency  declined 
faster)  than  the  controlled  exchange  rates  were 
permitted  to  fall. 

An  equilibrium  is  reached  if,  and  when,  the  in- 
crease of  prices  (i.  e.,  the  purchasing  power  of  the 
currency)  corresponds  with  the  increase  in  foreign 
exchange  rates  (i.  e.,  the  depreciation  of  the  ex- 
change of  the  countiy  concerned).  In  this  case 
no  artificial  stimulus  will  be  felt  by  either  ex- 
ports or  imports.  This  was  doubtless  the  case  in 
the  United  Kingdom  for  a  short  time  during  De- 
cember, 1920,  when  the  two  curves  coincided  at 
the  point  of  intersection. 

Both  kinds  of  divergence  or  spread  are  essen- 
tially of  a  temporary  character.  The  spread,  in 
whichever  direction  it  may  exist,  will  set  in  motion 
forces  that  will  tend  to  remove  it.  If  prices,  for  ex- 
ample, are  high  in  relation  to  exchange,  and  if  im- 


41  ai  72 


38    INTERNATIONAL  TRADE  BALANCE 

ports  for  that  reason  are  stimulated  into  the  coun- 
try with  depreciated  paper,  this  very  factor  of 
increased  imports  will  have  the  effect  of  reducing 
the  supply  of  foreign  exchange.  The  price  of  ex- 
change will,  therefore,  rise  with  the  result  that  the 
exchange  premium,  already  considerable  it  may  be, 
will  be  further  increased.  This  will  reduce  the  dis- 
parity between  prices  and  the  exchange  with  which 
we  started.  Naturally,  during  periods  of  exces- 
sive inflation  and  of  abnormal  foreign  trade  condi- 
tions the  "spread"  may  persist  a  longer  time  than 
would  otherwise  be  the  case. 

It  is  evident  that  in  a  consideration  of  foreign 
exchange  and  its  bearing  upon  trade,  account  must 
be  taken  of  two  different  elements  or  influences. 
One  of  these  is  the  result  of  inequalities  in  interna- 
tional indebtedness.  This  is  the  normal  one  oper- 
ating at  all  times.  The  other,  the  result  of  cur- 
rency inflation,  is  especially  prominent  during  such 
abnormal  periods  as  the  present.  The  former  oper- 
ates as  a  bounty  on  exports  or  imports  as  the  case 
may  be,  the  latter,  in  the  long  run,  does  not.  Thus, 
in  the  absence  of  a  depreciated  currency,  a  so-called 
unfavorable  exchange  which  arises  as  a  result  of 
an  adverse  balance  of  international  payments  does 
serve  as  a  bounty  on  exports  from  the  country  mak- 
ing the  payments.  In  this  instance,  by  our  hypothe- 
sis, the  currencies  of  both  countries  are  on  the  same 
basis,  gold,  and  there  is  an  unrestricted  movement 
of  the  means  of  payments,  gold  or  merchandise. 
If,  however,  gold  cannot  be  shipped,  either  because 


THEORY  OF  THE  BALANCE  OF  TRADE  39 

there  is  none  available  in  the  debtor  country  or 
because  of  government  restrictions,  then  the  place 
of  the  classic  gold  point,  as  a  limit  to  the  possible 
movement  of  the  exchanges,  is  taken  by  the  cost  of 
shipping  the  next  best  means  of  payment.  At  once 
the  possible  variation  in  the  exchange  rates  be- 
comes greater  than  at  ordinary  times.  If  the  cur- 
rencies of  the  two  countries  cease  to  be  on  the  same 
basis,  if  one  of  them,  for  example,  allows  its  paper 
money  to  suffer  depreciation  in  terms  of  gold,  then 
it  becomes  necessary  to  assume  the  existence  of  a 
new  par  of  exchange  which  will  provide  for  the  ex- 
istence of  this  new  basis.  The  resultant  exchange 
premium  growing  out  of  inflation  will  not  in  the 
long  run  constitute  a  bounty  on  exports  because,  as 
already  suggested,  prices  and  production  costs  will 
in  general  increase  correspondingly.  The  bounty, 
however,  which  may  arise  will  follow  as  a  result 
of  a  less  rapid  increase  in  prices  than  in  the  ex- 
change premium,  the  latter  responding  to  changes 
in  the  balance  of  international  payments.  A  de- 
preciated currency  will  affect  both  the  level  of 
prices  and  the  foreign  exchanges.  But  the  ex- 
changes are  directly  influenced  as  well  by  changes 
in  the  balance  of  international  payments.^ 

*  Although  the  depreciation  of  exchange  due  to  currency  in- 
flation will  not,  in  the  long  run,  operate  as  a  bounty  to  exports, 
it  may  do  so  before  the  full  effects  of  inflation  have  worked 
themselves  out.  In  this  case  some  prices  will  have  risen  and  others 
not,  or  at  least  not  proportionally.  This  state  of  affairs  obviously 
intensifies  exactly  that  relative  difference  in  costs  which  is  the 
tap  root  of  all  foreign  trade,  and  so  may  encourage  or  penalize, 


40   INTERNATIONAL  TRADE  BALANCE 

The  effect  upon  the  movement  of  exports  and  im- 
ports is,  therefore,  not  uniform  in  all  cases,  "It 
is  due,"  we  are  reminded  by  Professor  Taussig,  "to 
the  divergence  between  general  prices  on  the  one 
hand,  and  the  price  of  foreign  exchange  and  gold 
on  the  other.  And  during  the  time  for  which  the 
divergence  lasts — very  likely  a  considerable  time — 
it  may  run  either  way,  and  may  stimulate  or  de- 
press exports.  It  operates  to  promote  exports  from 
the  country  which  has  payments  to  make."  ^  From 
this  statement  there  emerges,  by  implication  at 
least,  the  conclusion  that  the  essential  factor  in- 
fluencing exports  and  imports  is  not  the  mere  de- 
preciation of  the  exchanges  as  such;  but,  instead, 
it  is  the  divergence  between  the  exchange  rate  and 
the  general  price  level.  It  would  follow,  therefore, 
that  a  depreciated  exchange  would  not  affect  the 
exports  or  imports  of  a  country  after  a  fairly  static 
condition  of  stable  depreciation  had  been  reached. 
Thus,  if  sterling  exchange  in  New  York  were  to 
stand  fairly  uniformly  for  a  number  of  years  at 

not  trade  in  general  but  particular  lines  of  export  or  import. 
It  is  suggested  that  in  the  pursuit  of  attractive  generalizations 
this   important  matter  is  sometimes   overlooked. 

Further,  if  the  general  rise  in  prices  due  to  inflation  is  less 
than  the  general  increase  in  the  rate  of  exchange,  e.g.,  as  in 
Germany  to-day,  then  there  is  obviously  a  bounty  on  exports.  If 
the  argument  just  outlined  is  correct,  then  this  obvious  bounty  is 
the  measure  of  the  extent  to  which  the  adverse  exchange  rate  of 
Germany  results  from  an  adverse  balance  of  payments  (indem- 
nities and  the  like). 

'  Taussig,  "International  Trade  under  Depreciated  Paper,"  Quar- 
terly/ Journal  of  Economics,  May,  1917. 


THEORY  OF  THE  BALANCE  OF  TRADE  41 

about  |3.75,  neither  the  imports  nor  exports  of 
Great  Britain  would  probably  be  affected.  They 
would  be  substantially  the  same  as  they  would 
have  been  had  there  been  no  depreciation.  How- 
ever, one  essential  difference  would  appear  in  a 
higher  general  level  of  British  prices,  measured  in 
the  depreciated  currency,  and  higher  to  the  ex- 
tent of  about  twenty-five  per  cent  than  would  have 
been  the  case  had  exchange  remained  at  par.  The 
so-called  bounty  to  the  exporter  is,  therefore,  not 
the  result  of  a  mere  premium  on  foreign  exchange. 
Instead,  it  is  the  result  of  a  rising  premium,  moving 
in  advance  of  the  rise  in  prices,  or  of  a  premium, 
static  it  may  be,  greater  than  the  increase  in  the 
price  level. 


CHAPTER  II 

THE  BALANCE  OF  TRADE  OF  THE  UNITED  STATES 

In  applying  the  principles  outlined  in  the  fore- 
going chapter,  attention  will  be  directed  alike  to 
countries  whose  trade  balance  is  marked  by  an  ex- 
cess of  exports  and  to  those  whose  foreign  trade 
is  characterized  by  an  excess  of  imports.  The  coun- 
tries which  stand  out  most  prominently  in  this  re- 
gard, in  their  respective  groups,  are  the  United 
States  and  the  United  Kingdom.  These  two,  for 
many  years,  have  been  the  outstanding  examples 
respectively  of  exporting  and  importing  countries. 
Attention  will  be  directed  first  to  the  United 
States,  the  countiy  par  excellence  with  an  excess 
of  merchandise  exports  over  imports. 

A  notable  feature  of  the  American  trade  balance 
is  the  wide  disparity  between  the  value  of  exports 
and  imports.  During  the  three  fiscal  years,  1911- 
13,  for  example,  the  excess  of  merchandise  and 
silver  exports  over  imports  had  an  average  annual 
value  of  1597,000,000.  And  this  characteristic  of 
excessive  exports  has  marked  American  foreign 
^  trade,  as  already  stated,  since  1874.  It  is  at  once 
evident  that  such  large  and  long-continued  credit 
balances  due  the  United  States  cannot  have  been 

42 


BALANCE  OF  TRADE  OF  UNITED  STATES    43 

paid  in  gold.  Kecalling  the  principle  that  in  every 
country  the  position  toward  which  international 
trade  always  tends  is  one  of  equivalence  between 
total  credits  and  total  debits,  we  shall  be  led  to  con- 
clude that  the  American  credit  balance  on  account 
of  merchandise  must  have  been  offset  by  an  excess 
of  invisible  debits  over  invisible  credits.    The  mer- 


Balance  of  Merchandise  Trade  Expressed  as  a  Percentage 
OF   Total   Merchandise   Trade,    1821-1918  * 
(After  1873  silver  is  treated  as  merchandise) 


+30^ 

1 

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mov 

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'1821'25  '30  '35  "40  '45  '50  '55  "60  '65  '70  '75  '80  "85  '90  'gSigOO'OS  '10  '151918 

chandise  or  visible  balance  of  credits  must  have  its 
roughly  equivalent  counterpart  in  a  balance  of  in- 
visible debits. 

A  survey  of  the  course  of  American  foreign  trade 
during  the  past  century  and  a  quarter  will  enable 
us  to  relate  certain  features  of  the  trade  balance  to 
the  varying  influence  predominatingly  exercised 
from  time  to  time  by  one  invisible  factor  or  an- 

'  Bullock,  Williams,  and  Tucker,  "The  Balance  of  Trade  of  the 
United  States,"  The  Review  of  Economic  Statistics,  July,  1919, 
p.  233. 


44    INTERNATIONAL  TRADE  BALANCE 

other.  As  indicated  in  the  foregoing  chapter,  the 
balance  of  trade  was  marked  by  an  excess  of  im- 
ports prior  to  1874.  This  so-called  unfavorable 
balance  prevailed  from  1789  onward,  except  for 
the  period  1838-49.  The  character  of  the  balance 
has  reflected  changes  in  the  various  invisible  items 
of  indebtedness.  The  foregoing  chart  depicts  the 
balance  of  merchandise  trade  of  the  United  States 
from  1821  onwards. 

The  foreign  trade  of  the  United  States  before 
1820  as  well  was  marked  by  an  excess  of  imports. 
This  is  explained  by  the  foreign  earnings  of  the 
American  merchant  marine,  which  at  that  time 
was  in  a  flourishing  condition.  The  merchandise 
trade  debit  was  not  only  offset  in  this  manner,  but 
it  was  more  than  balanced.  That  this  must  have 
been  so  is  evident  from  the  fact  that  "during  most 
of  the  period  under  consideration,  London  ex- 
change was  at  a  discount  in  the  United  States,"  in 
spite  of  the  importation  of  foreign  specie  and  the 
repayment  by  the  United  States  of  certain  foreign 
loans.^  From  1820  onward  until  the  temporary 
appearance  of  an  export  balance  in  1838,  the  con- 
tinuing and  growing  excess  of  imports  was  fos- 
tered, in  part,  by  the  willingness  of  foreigners  to 
invest  capital  in  American  enterprises.  During 
these  years,  however,  as  in  the  earlier  period,  the 
principal  factor  in  settling  the  foreign  obligations 
of  the  country  was  still  the  merchant  marine  earn- 
ings.    The  excess  of  merchandise  imports  did  not 

^Bullock,  Williams,  and  Tucker,  op.  cit.,  p.  217. 


BALANCE  OF  TRADE  OF  UNITED  STATES    45 

occasion  an  outflow  of  specie,  but,  on  the  contrary, 
notwithstanding  the  fact  that,  at  the  time,  there 
was  little  mining  of  the  precious  metals  in  the 
United  States,  the  amount  of  specie  in  the  country 
actually  increased.  This  seeming  paradox  finds 
its  explanation  in  the  statement  above  that  the 
merchant  marine  earnings  were  supplemented  by 
investments  of  foreign  capital  within  the  country. 
Among  the  results  was  a  vigorous  speculative 
movement  marked  by  rapidly  increasing  immigra- 
tion, inflation  of  currency,  rising  prices,  and  land 
speculation. 

This  movement  culminated  in  the  crisis  of  1837 
which  was  followed  by  several  years  of  depression. 
The  recovery,  appearing  about  1844,  was  acceler- 
ated by  the  large  increase  in  exports  of  foodstuffs, 
occasioned  by  the  potato  famine  in  Ireland  and 
other  crop  failures  in  Europe.  So  sudden  and 
large,  however,  was  the  resultant  excess  of  exports 
that  a  net  importation  of  specie  amounting  to 
$22,000,000  took  place  in  1847.  This  in  turn  so 
affected  the  situation  that  in  the  following  year 
an  excess  of  imports  reappeared,  accompanied  by 
a  net  export  of  nearly  |10,000,000  of  specie. 

During  this  period  of  twelve  years  following  the 
panic  of  1837,  the  discrepancy  between  imports 
and  exports  appeared  to  be  settled  principally 
through  shipments  of  specie.  Services  and  securi- 
ties seemingly  played  but  a  small  part.  In  this 
respect  the  period  in  question  stands  out  in  con- 
trast to  "all  previous  and  subsequent  periods  in 


46   INTERNATIONAL  TRADE  BALANCE 

the  history  of  our  [American]  foreign  trade."  * 
This  distinction  was  the  outcome  partly  of  the 
difficulty,  for  the  time,  of  borrowing  abroad,  and 
partly  of  improved  facilities  for  export,  due  to  the 
improvement  of  Western  lines  of  communication. 

Owing  to  the  panic  of  1837  and  the  repudiation 
of  debts  by  several  of  the  states,  European  in- 
vestors suffered,  and  naturally  became  apprehen- 
sive of  the  United  States  as  a  field  for  investment. 
During  the  years  immediately  following,  while 
their  confidence  was  being  slowly  reestablished,  the 
much  restricted  supply  of  foreign  capital  available 
to  the  United  States  had  the  effect  of  reducing  the 
ability  of  that  country  to  buy  foreign  goods.  The 
excess  of  merchandise  exports  was  roughly  bal- 
anced by  an  excess  of  specie  imports.  And  mer- 
chant marine  earnings,  which  formerly  had  had  the 
effect  of  swelling  the  volume  of  imports,  now  served 
to  offset  certain  invisible  debits  against  the  coun- 
try, the  principal  one  being  interest  on  foreign 
capital. 

Following  its  recoveiy  from  the  panic  of  1837, 
the  country  soon  witnessed  a  return  of  the  "un- 
favorable" trade  balance.  The  period  of  twenty- 
four  years  which  opened  with  the  gold  discovery  in 
California  and  closed  with  the  panic  of  1873,  was 

*  Bullock,  Williams,  and  Tucker,  op.  oit.,  p.  220.  The  writer 
wishes  to  acknowledge  his  indebtedness  in  the  preparation  of  this 
chapter  to  the  authors  of  this  scholarly  and  authoritative  article. 
Because  of  this  general  acknowledgment,  footnote  references  to  the 
article  will  appear  less  frequently  than  otherwise  would  be  the 


BALANCE  OF  TRADE  OF  UNITED  STATES    47 

characterized,  as  may  be  noted  from  the  chart 
above,  by  an  unusually  large  excess  of  imports ;  an 
excess  which,  in  the  main,  quite  regularly  increased 
till  the  very  last  years  of  the  period.  Within  this 
span  of  years  there  occurred  the  Civil  War,  with  its 
hampering  effect  upon  the  export  trade,  the  decline 
of  the  American  merchant  marine  as  an  important 
credit  factor,  a  large  expansion  in  the  production 
of  gold,  and  the  remarkable  increase  in  the  quantity 
of  foreign  capital  borrowed  for  domestic  invest- 
ment. 

Each  of  these  factors  contributed  toward  the  re- 
sult. The  Civil  War  was  responsible  for  the  fact 
that  during  the  five-year  period,  1861-65,  the  value 
of  American  exports  amounted  to  but  sixty-four 
per  cent  of  the  value  of  exports  during  the  preced- 
ing five  years  and  fifty-two  per  cent  for  the  five 
years  following.  The  principal  reason  for  this  de- 
crease lies  in  the  war-induced  interruption  of  the 
export  trade  in  cotton.  After  the  war,  exports  in- 
creased, although  not  so  rapidly  relatively  as  im- 
ports. Imports  as  well  were  affected  as  a  result 
of  the  war,  in  perhaps  a  less  direct,  but  none  the 
less  real,  manner.  So  much  so,  that  the  remark- 
able expansion  in  the  import  trade  during  the  eight 
years  following  the  war  gave  to  them  the  distinc- 
tion of  being  one  of  the  great  "boom"  periods  in 
Ajnerican  histoiy. 

As  a  consequence  of  the  financial  policy  of  the 
war,  specie  payments  were  suspended  in  1861,  and 
in  the  following  year  the  Government  began  its 


48    INTERNATIONAL  TRADE  BALANCE 

issues  of  inconvertible  paper  money.  Accompany- 
ing the  extravagant  issue  of  this  inconvertible 
currency,  we  find  heavy  expenditures  on  military 
account  and  an  unavoidable  destruction  of  eco- 
nomic goods.  The  result  naturally  was  a  violent 
rise  in  prices,  which  fostered  and  intensified  the 
speculative  movement.  In  so  far  as  prices  were 
raised  by  the  mere  depreciation  of  paper,  no  stimu- 
lus would  be  felt  by  imports,  for  foreigners  were, 
of  course,  not  paid  for  their  goods  in  paper  values. 
However,  it  is  certain  that  the  spirit  of  speculation 
and  extravagance,  both  public  and  private,  in- 
creased gold  prices  above  the  foreign  level  with  the 
result  that  the  importation  of  goods  was  stimu- 
lated. 

Moreover,  the  level  of  gold  prices  was  affected 
more  directly  by  the  increase  in  the  domestic  gold 
output  following  the  opening  of  the  mines  in  Cali- 
fornia. As  a  result  of  the  stimulus  imparted  to  the 
import  trade  through  increased  prices,  it  soon  be- 
came necessary  to  export  gold  as  an  offsetting 
factor.  With  the  depreciation  of  the  paper  cur- 
rency this  outflow  of  gold  was  increased.  We  find 
in  The  Review  of  Economic  Statistics  that  for  the 
entire  period,  1850-73,  the  net  outflow  of  specie,  of 
which  silver  formed  but  a  small  element,  amounted 
to  11,098,200,000,  or  an  annual  average  of  |45,- 
800,000.  For  the  same  period  the  excess  of 
merchandise  imports  over  exports  amounted  to 
11,541,000,000.    Combining  the  two,  we  find  the  net 


BALANCE  OF  TRADE  OF  UNITED  STATES    49 

balance  against  the  United  States  of  both  merchan- 
dise and  specie  to  be  |443,000,000,  or  an  annual 
average  of  |18,400,000. 

Against  this  visible  debit  balance  is  to  be  set  the 
balance  of  invisible  items,  of  which  the  chief  were 
foreign  borrowings,  interest  payments,  ship  earn- 
ings and  freight  charges,  tourist  expenditures,  and 
the  capital  holdings  of  immigrants. 

The  passing  of  the  American  merchant  marine 
was  contemporaneous  with  the  Civil  War.  The 
substitution  of  the  steel  steam  ship  for  the  sailing 
ship  and  the  change  in  the  subsidy  policy  of  the 
United  States  were  other  factors  in  the  decline  of 
American  ocean  shipping.  With  the  virtual  dis- 
appearance of  the  merchant  marine,  the  old  profits 
on  shipping,  so  long  an  important  agency  in  main- 
taining the  equilibrium  of  foreign  payments,  gradu- 
ally vanished.  In  time,  they  ceased  to  be  a  credit 
item  and  their  place  was  taken  by  a  debit  charge 
in  the  form  of  freights  paid  to  foreign  shipping 
companies.  For  the  period  in  hand,  however,  tlie 
freights  earned  by  American  ships  surpassed  the 
charges  paid  to  foreigners  by  a  small  amount. 

A  factor  of  prime  importance  whose  existence 
made  possible,  in  great  part,  the  large  excess  of 
merchandise  imports  during  this  period,  was  the 
very  large  quantity  of  foreign  capital  invested 
within  the  country.  These  years,  as  already  stated, 
were  marked  by  speculative  activity.  One  phase 
of  this  appears  in  the  rapid  expansion  of  the  rail- 


50    INTERNATIONAL  TRADE  BALANCE 

way  mileage.  Railroads  were  built  on  a  scale  to 
that  time  undreamed  of — built  far  beyond  the  im- 
mediate demands  of  trade  or  population.  This  ac- 
tivity was  furthered  by  a  large  inflow  of  foreign 
capital.  The  extension  of  the  railways  stimulated 
a  movement  of  population  westward,  which  in 
turn  served  as  an  impetus  to  commercial  and  in- 
dustrial activity.  The  interest  of  the  European 
investor  in  the  United  States  had  been  abundantly 
restored.  For  the  period  as  a  whole  probably 
11,000,000,000  of  foreign  capital  was  invested  in 
the  United  States.  There  must  be  charged,  how- 
ever, against  this  sum  the  annual  payments  of  in- 
terest to  foreigners.  These  have  been  estimated  in 
the  aggregate  at  about  |900,000,000.  These  two 
items  taken  together  yielded,  therefore,  a  net  credit, 
although,  it  is  true,  a  comparatively  small  one. 
The  other  and  lesser  invisible  items  are  estimated 
roughly  to  have  balanced.  The  net  result  for  the 
period,  1850-73,  taking  into  consideration  all  fac- 
tors, both  visible  and  invisible,  was  a  slight  debit 
balance  against  the  countiy. 

Evidence  was  already  at  hand,  even  before  the 
close  of  the  period,  that  an  overturn  must  soon 
occur  in  the  merchandise  balance.  It  was  forecast 
by  David  A.  Wells  in  1869  that  commodity  exports 
must  increase  and  sui^^ass  imports,  in  order  that 
interest  payable  to  European  capital  lenders  be 
paid.  The  annual  interest  charge  had  grown  so 
large  that  sooner  or  later  the  merchandise  balance 
must  show  an  excess  of  exports  to  offset  the  grow- 


BALANCE  OF  TRADE  OF  UNITED  STATES    51 

ing  invisible  items.     With  singular  prophetic  ac- 
curacy Professor  Cairnes  wrote,  in  1873 :  ^ 

"These  considerations  lead  me  to  the  conclusion 
that  the  present  condition  of  the  external  trade  of 
the  United  States  is  essentially  abnormal  and  tem- 
porary. If  that  countiy  is  to  continue  to  discharge 
her  liabilities  to  foreigners,  the  relation,  which  at 
present  obtains  between  exports  and  imports  in 
her  external  trade,  must  be  inverted.  Her  exports 
must  once  again,  as  previous  to  1860,  be  made  to 
exceed  her  imports,  and  this  by  an  amount  greater 
than  the  excess  of  that  former  time  in  proportion 
as  her  financial  obligations  to  foreign  countries 
have  in  the  interval  increased.  This,  it  seems  to 
me,  is  a  result  which  may  be  predicted  with  the 
utmost  confidence.  The  end  may  be  reached  either 
by  an  extension  of  exportation,  or  by  a  curtailment 
of  importation,  or  by  combining  both  these  proc- 
esses, but  by  one  means  or  other  reached  it  will 
need  to  be." 

Before  the  end  anticipated  by  Cairnes  could  be 
attained,  however,  it  was  essential,  as  indeed  he 
pointed  out,  that  a  readjustment  of  prices  inter- 
vene. An  enabling  condition  making  possible  an 
excess  of  exports  over  imports  was  the  substantial 
reduction  in  prices  in  the  United  States  relative 
to  Europe.  The  decline  in  the  price  level  in  that 
country,  sufficient  to  make  importation  more  diffi- 
cult and  exportation  more  profitable,  would  prob- 
ably come,  he  thought,  "with  a  crash."    He,  there- 

*  Cairnes,  "Some  Leading  Principles  of  Political  Economy,"  p. 
444. 


52    INTERNATIONAL  TRADE  BALANCE 

fore,  viewed  "the  immediate  future  of  American 
trade  as  a  period  of  much  disturbance  and  fluctua- 
tion, culminating,  it  is  possible,  from  time  to  time, 
in  commercial  crises." 

His  predictions  were  both  speedily  and  literally 
fulfilled.  Beginning  in  Vienna  in  the  spring  of  the 
year  and  passing  through  Germany  and  England, 
the  crisis  of  1873  made  its  appearance  in  New  York 
in  September.  It  affected  practically  every  com- 
mercial and  financial  operation  of  the  country,  and 
the  succeeding  depression,  notable  both  for  its  se- 
verity and  duration,  continued  in  most  lines  of 
industiy  until  1878.  Europe,  the  ready  source  of 
capital,  was  now,  for  the  time,  dried  up.  Railroad 
and  other  construction  enterprises  ceased.  With 
the  pricking  of  the  speculative  bubble,  and  the  at- 
tendant contraction  of  credit  and  severe  curtail- 
ment of  business  activity,  prices  declined.  At  once 
imports  were  restricted  and  exports  increased,  with 
the  result  that  the  excess  of  merchandise  imports 
which  amonnted  in  1873  to  |120,000,000  was 
changed  in  the  following  year  to  an  excess  of  ex- 
ports equal  to  |19,000,000.  And  from  1874  to  the 
present  time  American  trade  has  been  marked  by 
an  export  balance  except  in  the  four  years,  1875, 
1888,  1889,  and  1893.  The  early  seventies  formed  a 
transitional  period  in  the  counti'y's  foreign  trade, 
the  stage  at  which  it  became  a  so-called  "mature" 
borrowing  country. 

The  recoveiy  from  the  period  of  depression  was 
accelerated  by  the  synchronization  in  1879  of  har- 


BALANCE  OF  TRADE  OF  UNITED  STATES    53 

vest  failures  in  Europe  and  bountiful  crops  in  the 
United  States.  An  unusually  large  inflow  of  gold 
into  the  country  was  occasioned  by  the  heavy  ex- 
ports of  agricultural  products  which  followed. 
And  the  resumption  of  specie  payments,  as  well, 
in  1879,  which  was  rendered  more  easy  by  these 
large  gold  imports,  had  the  effect  of  restoring 
soundness  to  the  monetary  and  credit  system. 

A  period  of  prosperity  was  thus  ushered  in, 
marked  by  another  era  of  rapid  railroad  construc- 
tion and  general  industrial  expansion.  This  in 
turn  served  to  attract  large  quantities  of  foreign 
capital.  The  prosperity  was  short-lived,  however. 
Crop  failures  and  excessive  railroad  construction 
led  to  the  minor  crisis  of  1884,  During  the  adverse 
years  there  was  a  considerable  withdrawal  of  capi- 
tal by  European  investors.  The  depression  in  turn 
was  of  short  duration,  the  year  1886  again  wit- 
nessing renewed  extension  of  railways.  Once  again 
foreign  capital,  chiefly  British,  sought  investment 
in  the  United  States.  That  country,  in  common 
with  Argentina,  Germany,  and  others,  profited 
from  the  readiness  with  which  English  capitalists 
were  willing  to  invest  abroad  their  large  accumu- 
lations of  capital.  This  "wave  of  British  invest- 
ments" continued  until  severely  checked  by  the 
Baring  panic  of  1890,  in  London,  occasioned  largely 
by  the  inability  of  the  Argentine  Government  to 
meet  payments  of  interest.  The  effects  of  this 
European  crisis  were  felt  acutely  in  the  United 
States,  although  a  complete  breakdown  was  de- 


54   INTERNATIONAL  TRADE  BALANCE 

ferred  until  1893,  owing  to  the  enormous  crops  and 
heavy  exports  of  1892. 

As  a  consequence  of  the  critical  situation  in 
England,  following  upon  the  failure  of  Baring 
Brothers,  a  heavy  demand  for  funds  was  made  upon 
the  New  York  money  market.  British  holders  of 
American  securities  sold  extensively  in  New  York, 
thus  inducing  large  gold  exports.  A  result  of  this 
reverse  security  movement  against  the  United 
States  was  the  withdrawal  of  about  |300,000,000  of 
European  capital  during  the  years  1890-96.  Al- 
though "sterling  exchange  in  New  York  stood  al- 
most continuously  at  the  gold  export  point"  during 
the  first  six  months  of  1891,  the  crisis  in  the  United 
States  was  avoided,  as  stated  above,  till  1893. 

During  the  twenty  years  intervening  between  the 
major  crises  of  1873  and  1893  the  excess  of  exports 
over  imports  had  an  average  annual  value  of  about 
$113,000,000.  In  the  same  period  there  was  a  net 
export  of  gold  averaging  |5,000,000  a  year.  This 
favorable  balance  on  account  of  gold  and  merchan- 
dise was  the  offsetting  factor,  balancing  the  large 
volume  of  ''invisible"  debit  items  against  the  coun- 
try. While  approximately  |1,000,000,000  of  new 
foreign  capital  was  invested  in  the  United  States 
during  the  two  decades  in  question,  the  amount  of 
interest  payable  abroad  had  naturally  increased 
proportionately  with  the  steadily  accumulating  vol- 
ume of  foreign  borrowings,  with  the  result  that  the 
total  interest  payments  during  these  years  prob- 
ably amounted  to  |1,870,000,000.     The  net  result, 


BALANCE  OF  TRADE  OF  UNITED  STATES    55 

therefore,  taking  both  factors  into  account,  was  a 
debit  of  $870,000,000,  or  an  annual  average  of  about 
$40,000,000.  The  decline  of  the  merchant  marine 
had  continued,  and  to  such  a  degree  that  the  freight 
charges  payable  by  Americans  to  foreign  shipping 
companies  exceeded  the  freight  earnings  of  Ameri- 
can ships  engaged  in  foreign  trade,  by  an  amount 
which  averaged  for  the  period  about  $25,000,000  a 
year.  A  further  invisible  debit  item  was  the  ex- 
penditure of  American  travelers  abroad.  It  is  es- 
timated that  this  charge  exceeded  the  expenditures 
of  European  tourists  in  the  United  States  by  ap- 
proximately $35,000,000  annually.  And,  finally,  it 
is  necessary  to  take  account  of  immigrant  remit- 
tances and  other  miscellaneous  charges  against  the 
country.  Although  the  volume  of  remittances  by 
immigrants  was  not  nearly  as  large  as  it  became 
after  the  opening  of  the  new  century,  it  was  none 
the  less  of  considerable  importance.  In  the  study 
presented  in  The  Review  of  Economic  Statistics  an 
average  annual  sum  of  $20,000,000  is  allowed  to 
cover  this  and  other  lesser  items  of  indebtedness. 
During  the  years  between  the  two  panics,  there- 
fore, the  visible  credit  balance  on  account  of  mer- 
chandise and  gold  approximately  equaled  the  ex- 
cess of  invisible  debit  items. 

From  that  time  onward  till  the  outbreak  of  the 
World  War  the  balance  of  international  payments 
was  similar,  in  its  essential  features,  to  that  of  the 
period  just  considered.  It  is  true,  the  favorable 
merchandise  balance  was  much  larger.    During  the 


56    INTERNATIONAL  TRADE  BALANCE 

twenty  years  preceding  the  war  the  excess  of 
exports  averaged  annually  about  |485,000,000, 
whereas,  as  mentioned  above,  the  yearly  average  for 
the  two  decades  before  1894  was  |113,000,000  only. 

Before  turning  to  a  consideration  of  the  invisible 
factors  which  served  to  make  this  excess  of  exports 
imperative,  it  will  be  well  to  take  note  of  the  gen- 
eral condition  of  business  in  the  country  at  the 
time.  In  common  with  the  rest  of  the  commercial 
world,  the  United  States  entered  upon  a  period  of 
rapid  expansion  during  the  late  nineties.  With 
but  minor  reactions,  this  condition  of  prosperity 
continued  till  1907. 

The  low-water  mark  of  the  depression  which  fol- 
lowed the  panic  of  1893  was  reached  in  the  United 
States  in  1895.  The  lowest  point  in  the  general 
downward  movement  of  prices  which  began  in  the 
panic  of  1873  was  touched  in  1897.  Market  con- 
ditions at  home  were  adverse,  stocks  and  materials 
had  accumulated,  and  wages  were  low.  Conditions 
in  general  were  very  depressed,  but,  for  this  very 
reason,  the  country  was  in  a  position  to  take  in- 
stant advantage  of  export  opportunities  in  foreign 
markets.  Not  only  were  agricultural  products 
exported  in  large  quantities,  but  manufactured 
goods  began  to  flow  abroad  in  increasing  volume. 
American  manufactures  invaded  even  the  markets 
of  continental  Europe.  Manufactured  products 
constituted  18  per  cent  of  the  total  exports  in  1892, 
25  per  cent  in  1895,  35  per  cent  in  1900,  and  nearly 
49  per  cent  in  1913. 


BALANCE  OF  TRADE  OF  UNITED  STATES    57 

So  notable  was  the  expansion  in  exports  that  the 
balance  of  international  payments  during  the 
twenty  years  prior  to  the  war  was  marked  by  a  net 
import  of  gold,  averaging  |9, 000,000  annually.  In 
other  words,  the  exports  were  sufflciently  large  to 
equal  both  the  imports  and  the  balance  of  invisible 
debits  and  still  leave  a  credit  which  was  met  by  a 
gold  inflow.  It  is  not  to  be  concluded,  however, 
that  each  year  of  the  period  was  marked  by  a  net 
import  of  specie.  Indeed,  there  were  nearly  as 
many  years  in  which  the  specie  movement  was  out- 
ward as  those  marked  by  an  inflow. 

It  has  already  been  stated  that  the  merchandise 
balance  during  these  years  was  characterized  by 
an  excess  of  exports  averaging  |485,000,000.  If 
now  we  deduct  from  this  amount  the  |9,000,000, 
constituting  the  net  gold  inflow,  we  shall  have  an 
annual  average  of  |476,000,000  as  a  net  credit 
balance  on  account  of  merchandise  and  specie.  As 
an  offset  to  this  sum  we  shall  expect  to  charge  an 
approximately  equal  debit  balance  on  account  of 
the  several  invisible  items. 

The  principal  factors  in  this  so-called  invisible 
account  were  new  capital  borrowings  from  abroad 
and  interest  payments  on  American  capital  in- 
vested abroad,  on  the  credit  side ;  while  on  the  debit 
side  the  chief  items  were  the  annual  interest 
charges  payable  abroad,  tourist  expenditures,  im- 
migrant remittances,  and  ocean  freight  charges. 
These  items  may  be  set  forth  with  approximate 
accuracy.    The  new  foreign  capital  borrowings  ex- 


58    INTERNATIONAL  TRADE  BALANCE 

ceeded  the  volume  of  American  capital  invested 
abroad  by  an  annual  average  of  about  |50,000,000. 
The  larger  items,  however,  we  shall  find  on  the 
debit  side.  Net  interest  charges  payable  abroad 
averaged  |160,000,000,  tourist  expenditures,  |170,- 
000,000,  immigrant  remittances,  |150,000,000,  net 
freight  charges,  $30,000,000,  and  certain  miscel- 
laneous items,  including  insurance  premiums,  |30,- 
000,000.  If  we  were  to  assemble  all  the  factors, 
both  visible  and  invisible,  we  should  discover  for 
the  twenty  years  in  question  a  comparatively  small 
net  debit  against  the  countiy. 

In  order  the  more  concretely  to  reveal  the  state 
of  the  American  balance  of  international  payments, 
let  us  construct  the  trade  balance  sheet  for  the 
United  States  for  the  three  fiscal  years  1911-13.  It 
naturally  will  vary  somewhat  from  the  balance 
struck  for  the  year  1909  by  Sir  George  Paish. 

Turning  first  to  the  visible  trade  items  let  us  con- 
sider the  balance  of  trade  on  account  of  merchan- 
dise and  specie.  For  the  three  fiscal  years  in  ques- 
tion the  statement  is  as  follows : 

Exports  ajvd  Imports  of  ^Mjerchandise,  Silver  and  Gold, 

1911-13* 

In  Millions 


Merchandise 

1911 

1912 

1913 

Total  Exports  . . 
Total  Imports  . . 

$2,049.3 
1,527.2 

$2,204.3 
1,653.2 

$2,465.8 
1,813.0 

Excess  of  Exports 

$    522.1 

$    551.1 

$    652.8 

Average  annual  value  of  excess  of  exports,  $575,300,000 
1  "Statistical  Abstract  of  the  United  States,  1913,"   pp.  327,  639. 


BALANCE  OF  TRADE  OF  UNITED  STATES    59 

In  Millions 


Silver 

1911 

1912 

1913 

Exports     

Imports    

$64.7 
45.9 

$64.9 
47.1 

$71.6 
41.3 

Excess  of  Exports 

$18.8 

$17.8 

$30.3 

Average  annual  value  of  excess  of  exports  $22,300,000 
In  Millions 

Gold 

1911 

1912 

1913 

Exports    

Imports    

$22.5 
73.6 

$57.3 
48.9 

$77.8 
69.2 

Excess  of  Imports 

$51.1 

$  8.4  (exp.) 

$  8.6  (exp.) 

Average  annual  value  of  excess  of  imports  $11,400,000 


On  account  of  merchandise  and  specie,  therefore, 
there  was  a  total  average  yearly  excess  of  exports 
over  imports  of  |586,200,000. 

This  large  credit  balance  served,  we  may  antici- 
pate, as  the  offset  against  a  debit  balance  on  ac- 
count of  the  invisible  items.  Chief  among  the 
invisible  factors  were  capital  investments  and  in- 
terest payments.  The  importation  of  capital  into 
the  United  States  from  Europe  dates  from  the 
seventeenth  century.  The  purpose  at  that  time  was 
the  development  of  sugar,  tobacco,  and  cotton 
plantations  and  the  extension  of  mercantile  under- 
takings. Later,  large  amounts  of  foreign  capital 
were  invested  in  American  government  securities. 
Still  later,  the  chief  American  borrowers  were  the 
railroads.     It  was  estimated  by  Sir  George  Paish 


60   INTERNATIONAL  TRADE  BALANCE 

in  1910  that  approximately  |6,000,000,000  worth 
of  foreign  capital  was  then  invested  in  the  United 
States  in  some  foiTQ  of  permanent  securities.^  Of 
this  about  |3,500,000,000  was  British  capital,  |750,- 
000,000  German,  the  same  amount  Dutch,  and 
1500,000,000  French.  Other  competent  investiga- 
tors have  placed  the  total  of  foreign  investments  in 
the  United  States  prior  to  the  war  at  about  |5,000,- 
000,000.  If,  therefore,  the  figure  |5,500,000,000 
be  taken  as  approximating  the  total  it  will  prob- 
ably be  subject  to  but  a  small  margin  of  error.  The 
interest  charge  upon  these  investments  of  foreign 
capital  amounted  roughly  to  |275, 000,000  a  year 
during  the  three-year  period  in  question.  As  an 
offset,  however,  against  this  debit  there  must  be 
placed  the  interest  received  by  Americans  on  their 
capital  invested  in  Canada,  Mexico,  Cuba,  and 
other  foreign  countries.  United  States  capital  thus 
invested  amounted  in  1913  to  about  |1,500,000,000 
upon  which  the  interest  return  was  probably  not 
less  than  |75,000,000.  Deducting  this  from  the 
interest  payments  that  the  United  States  had  to 
make  to  foreign  lenders,  it  will  be  seen  that,  during 
the  years  immediately  prior  to  the  warj  the  Ameri- 
can people  were  subject  to  a  net  payment  of  about 
1200,000,000  a  year  to  other  countries  for  interest 
and  dividends  upon  capital.  It  may  be  well  to 
point  out  that  the  discrepancy  between  this  amount 
and  the  item  of  |160, 000,000  set  forth  above  as  the 

*  Paish,  "Trade  Balance  of  the  United  States,"  U.  8.  Monetary 
Commission  Reports,  p.   175. 


BALANCE  OF  TRADE  OF  UNITED  STATES    61 

average  interest  charge  on  foreign  capital  during 
the  twenty  years  preceding  the  war  is  an  apparent 
one  only  and  not  real.  Obviously  during  the  earlier 
years  of  that  longer  period  the  interest  charge  was 
less  than  during  the  later  years,  owing  to  the  fact 
that  the  volume  of  foreign  capital  invested  within 
the  United  States  was  steadily  mounting  through- 
out the  period. 

Against  this  debit  on  account  of  interest  pay- 
ments, however,  there  is  to  be  placed  a  credit  item 
representing  a  net  inflow  of  new  capital.  Although 
American  capital  began  about  1900  to  flow  abroad 
in  large  volume  for  investment  purposes  it  is  never- 
theless probably  true  that  during  the  years  under 
review  there  was  a  sufficiently  large  importation 
of  foreign  capital  to  yield  a  net  movement  into  the 
country.  It  is  estimated  in  The  Review  of  Eco- 
nomic Statistics  that  during  the  twenty  years  pre- 
ceding the  war  the  net  inflow  of  capital  amounted 
to  about  150,000,000  a  year.  Inasmuch  as  foreign 
capital  entered  the  country  in  large  quantities 
during  the  earlier  part  of  the  period,  while  Ameri- 
can capital  on  the  other  hand  sought  investment 
in  foreign  lands  increasingly  during  the  latter 
part,  we  may  estimate  for  the  years  1911-13  a  net 
inflow  of  about  |20,000,000  annually. 

An  invisible  debit  nearly  as  large,  for  the  years 
under  consideration,  as  that  of  interest  payments 
was  the  expenditures  abroad  of  American  tourists. 
Among  the  consequences  which  followed  in  the 
wake  of  the  wave  of  prosperity  ushered  in  during 


62    INTERNATIONAL  TRADE  BALANCE 

the  last  years  of  the  nineteenth  century  was  a  large 
increase  in  the  number  of  Americans  traveling 
abroad.  Thus,  the  number  of  citizens  of  the  United 
States  returning  to  their  native  country  from  for- 
eign lands  increased  from  94,000  in  1898  to  167,000 
in  1905,  and  286,000  in  1913.  According  to  the 
estimate  of  Paish,  American  tourists  expended 
abroad  about  |200,000,000  in  1908.  This  sum  did 
not  include  expenditures  for  clothing,  works  of 
art,  jeweliy,  etc.,  which  are  declared  at  the  customs 
and  are  therefore  included  among  the  imports. 
Against  this  debit,  Paish  placed  as  a  credit  the 
expenditure  in  the  United  States  of  foreign  tour- 
ists, amounting,  he  estimated,  to  |30,000,000.  For 
the  year  1908,  therefore,  there  was  a  net  balance 
against  the  United  States  of  |170,000,000  on  this 
account.  A  Bradstreefs  computation  in  1914 
placed  the  net  annual  outgo  at  |175,000,000.^ 
Their  basis  of  estimate  was  such  that  this  amount 
may  fairly  be  looked  upon  as  quite  conservative. 
The  average  annual  debit  on  account  of  tourist  ex- 
penditures for  the  years  1911-13  may  therefore 
probably  be  placed  quite  safely  at  |175,000,000. 

A  no  less  notable  increase  appeared  during  the 
first  decade  and  a  half  of  the  new  century  in  the 
growth  of  immigrants'  remittances.  As  a  result  of 
a  careful  investigation  undertaken  in  1907  of  in- 
dividual foreign  payments  by  postal  orders,  by 
bank  drafts,  and  other  means,  it  was  estimated  that 
approximately  |250,000,000  was  remitted  to  Eu- 

^  Bradstreefs,  November  21,  1914,  p.  754. 


BALANCE  OF  TRADE  OF  UNITED  STATES    63 

rope.^  It  is  probable,  however,  that  this  sum  was 
too  large  as  a  statement  of  immigrant  remittances 
alone,  for  the  reason  that  it  included  certain  pay- 
ments sent  abroad  in  purchase  of  goods  which 
naturally  would  appear  in  the  merchandise  im- 
ports. Allowing  for  this  and  other  such  factors,  it 
is  probable  that  immigrant  remittances  averaged 
during  1911-13  about  |175,000,000  a  year. 

Among  the  remaining  items  of  indebtedness  the 
principal  ones  were  freight  payments  and  insurance 
premiums  and  commissions  to  financial  institu- 
tions. The  excess  of  freight  charges  payable 
abroad  over  freight  earnings  of  American  ships  in 
ocean  traffic  probably  averaged  about  |35,000,000 
during  the  period  1911-13.  Various  miscellaneous 
items,  including  insurance  premiums  and  the  like, 
have  been  estimated  to  equal  about  $30,000,000  a 
year  during  the  same  period. 

Let  us  now  gather  together  the  various  items, 
both  visible  and  invisible,  in  the  form  of  a  balance 
sheet,  based  on  average  annual  figures  for  the  years 
under  review. 


(Figures  denote  millions) 
Visible  Credits  Years,  1911-13  Visible  Debits 


Merchandise:  average  ex- 
cess of  exports $575.3 

Silver:   average  excess  of 

exports 22.3 


Gold:    average    excess    of 

imports   $  11.4 


$597.6  $  11.4 

Average  annual  excess  of  Visible  Credits $586.2 

^Speare,  North  American  Review,  January,   1908. 


64    INTERNATIONAL  TRADE  BALANCE 

Invisible  Credits  Invisible  Debits 


Net  capital  borrowings 
from  abroad :  annual 
average    $20. 


Net  interest  payable  abroad .  $200. 
Tourists'  expenditures  ....  175. 
Immigrants'  remittances   . .    175. 

Net  freight  charges   35. 

Miscellaneous  items    30. 


$20. 
Average  annual  excess  of  Invisible  Debits. 


$615. 


,$595. 


Evidence  of  an  inductive  character  has  thus  been 
drawn  from  the  experience  of  the  United  States 
to  support  the  contention,  reached  deductively  in 
the  first  instance,  that  there  must  be  an  approxi- 
mate equivalence  for  eveiy  country  between  total 
credits  and  total  debits. 

The  American  balance  of  trade,  with  its  in- 
creasing excess  of  merchandise  exports  from  1874 
onward,  is  no  more  to  be  considered  immune  from 
change  now  than  during  the  early  seventies.  The 
transition  which  occurred  in  1874  in  the  trade  bal- 
ance from  an  excess  of  imports  to  one  of  exports  is 
to  be  followed  in  the  not  remote  future  by  a  further 
transition,  this  time  in  the  opposite  direction.  .Al- 
though this  change,  quite  apart  from  the  World 
War,  might  have  been  considered  as  inevitable 
sometime  in  the  future,  its  comparative  proximity 
is  the  outcome  of  circumstances  growing  out  of 
that  event. 

With  the  outbreak  of  war,  international  trade  be- 
came utterly  dislocated.  An  extraordinary  demand 
arose  in  Europe  for  war  munitions  and  supplies  of 
all  kinds,  of  which  the  principal  source  was  the 


BALANCE  OF  TRADE  OF  UNITED  STATES    65 

United  States,  while  at  the  same  time  Europe  suf- 
fered through  inability  to  export  goods  in  return. 
The  result  was  an  unprecedented  growth  of  the  ex- 
port balance  of  the  United  States  attended  by  an 
enormous  inflow  of  gold.  Unable  to  export  goods 
in  a  volume  at  all  commensurate  with  their  vast 
purchases  of  war  supplies  from  the  United  States 
and  recognizing  the  rapidly  dwindling  nature  of 
their  gold  reserves,  the  European  nations  were 
forced  to  turn  to  the  United  States  for  loans  with 
which  to  finance  this  one-sided  trade.  On  so  vast  a 
scale  did  this  occur  that  the  United  States,  the 
world's  greatest  borrower  of  capital  before  1914, 
l>ecame  the  world's  most  rapid  lender  of  capital. 
A  further  consequence  of  the  war,  with  an  impor- 
tant bearing  upon  the  future  balance  of  trade  of 
the  country,  is  to  be  found  in  the  merchant  marine, 
which,  for  so  long  a  time  nearly  moribund,  has  been 
revived  on  a  very  large  scale. 

During  the  period  of  the  war,  from  the  summer  of 
1914  to  December,  1918,  the  excess  of  American 
exports  of  merchandise  and  silver  over  imports 
reached  the  enormous  total  of  |11,800,000,000.  This 
represented  an  average  annual  excess  of  exports  of 
$2,624,000,000,  as  compared  with  the  average  ex- 
port balance  of  less  than  |600,000,000  during  the 
years  immediately  preceding  1914.  And  even  that 
extraordinary  total  was  surpassed  by  the  excess  of 
exports  over  imports  attained  during  the  fiscal  year 
ending  June  30,  1919.  The  export  balance  of  that 
year,  the  largest  in  the  history  of  the  country, 


66   INTERNATIONAL  TRADE  BALANCE 

equaled  |4,136,000,000.  During  the  following  fiscal 
year,  owing  to  the  rapid  advance  in  the  value  of 
imports,  the  so-called  favorable  balance  declined  to 
12,872,000,000.  That  the  peak  in  the  American  ex- 
cess of  exports  over  imports  has  probably  been 
passed  may  be  inferred  from  the  further  evidence 
that  during  the  next  succeeding  fiscal  year,  which 
is  to  close  on  June  30, 1921,  the  export  balance  will, 
it  is  estimated,  also  fall  short  of  the  |3,000,000,000 
mark. 

In  addition  to  the  war-induced  demand  on  the 
part  of  Europe  for  American  goods,  to  which  refer- 
ence has  already  been  made,  there  is  a  further  rea- 
son for  these  abnormally  large  "favorable"  bal- 
ances. The  rise  in  prices  the  world  over,  itself  an 
outcome  of  the  war,  has  contributed  toward  the 
result.  Although  the  quantities  of  goods  exported 
and  imported  by  the  United  States  were,  it  is  true, 
larger  in  1920  than  in  1914,  the  quantity  increase 
was  not  at  all  comparable  to  the  recorded  increase 
in  values.  Moreover,  it  is  to  be  noted  that  American 
imports  since  1914  have,  in  major  part,  been  drawn 
from  countries  not  directly  affected  by  the  war,  and 
they  have  consisted  largely  of  commodities  not 
necessary  for  military  pui'poses.  On  the  other 
hand,  American  exports  have  mostly  been  goods  ur- 
gently needed,  in  the  first  instance  to  carry  on  the 
war  and  latterly  to  feed  the  starving  millions  of 
Europe  and  to  assist  in  the  industrial  rehabilita- 
tion of  that  continent.  As  a  consequence,  the  rise 
in  prices  of  the  goods  exported  by  the  United  States 


BALANCE  OF  TRADE  OF  UNITED  STATES   67 

has  been,  in  the  main,  much  greater  than  the  rise  in 
prices  of  the  articles  imported. 

The  decline,  during  the  past  two  years,  in  the 
excess  of  exports  has  been  the  result  of  a  greater 
relative  advance  in  the  value  of  imports.  This  de- 
cline in  the  export  balance  "may  be  hailed,"  Pro- 
fessor Litman  declares,  "as  one  of  the  most  satis- 
factory developments  in  our  commercial  relations 
with  foreign  countries;  only  through  such  a  de- 
cline, if  it  is  carried  far  enough,  shall  we,  as  a 
creditor  nation,  be  able  to  place  our  foreign 
commercial  intercourse  on  a  sound  business 
basis."  ^ 

The  large  credits  accumulated  abroad  by  the 
United  States  as  a  result  of  the  trade  balances  have 
been  paid,  or  are  in  process  of  being  paid,  in  vari- 
ous ways.  Payment  of  the  enormous  American  bal- 
ances in  goods  has  been  entirely  out  of  the  question, 
owing  to  the  dislocation  of  European  industries  con- 
sequent upon  the  war.  Likewise,  payment  in  gold 
or  in  services  has  been  impossible  on  so  large  a 
scale.  While  goods,  services,  and  gold  have  served 
in  part  to  meet  the  case,  payment  has,  through 
necessity,  taken  other  form.  Settlement  has  been 
ejffected  largely  in  the  form  of  American  loans 
abroad  and  the  return  to  the  United  States  of  do- 
mestic securities  held  abroad  before  1914. 

Owing  to  the  war,  the  international  movement  of 
gold  surpassed  during  the  four  years  and  a  half 
from  July,  1914,  to  December,  1918,  anything  of 

*  Litman,  Armals  of  American  Academy,  March,  1921. 


68   INTERNATIONAL  TRADE  BALANCE 

the  kind  known  before.  While  both  imports  and 
exports  of  gold  were  larger  than  ever  before  to 
and  from  the  United  States,  there  was  a  net  import 
of  gold  of  11,029,000,000  into  the  country  during 
the  war  period.  Although,  as  a  gold  movement, 
this  was  of  unprecedented  proportions,  it  neverthe- 
less was  comparatively  ineffective  as  an  offsetting 
factor  to  place  against  the  huge  export  trade  bal- 
ance of  111,800,000,000  accumulated  during  the 
same  four  years  and  a  half.  Between  December, 
1918,  and  April,  1921,  the  exports  of  gold  nearly 
equaled  the  imports.  Gold  shipments  have,  there- 
fore, been  but  a  minor  factor  in  the  settlement  of 
the  American  export  trade. 

The  most  important  device  employed  in  the 
financing  of  this  trade  and  in  the  regulation  of  the 
exchanges  has  been,  as  stated  above,  the  transfer 
of  credits.  This  was  effected  in  three  ways:  the 
return  of  American  securities  from  Europe  to  the 
United  States,  the  investment  of  American  capital 
in  foreign  countries  on  private  account,  and  loans 
by  the  United  States  Government  to  the  Allied 
Governments. 

As  early  as  the  spring  of  1914  the  reverse  move- 
ment in  securities  began  to  be  noticeable.  This 
early  re-sale  of  American  securities  back  to  the 
United  States  was  chiefly  on  the  part  of  the  con- 
tinental countries  of  Europe,  and  it  has  been  viewed 
as  evidence  that  war  was  anticipated  by  the  Cen- 
tral Powers.  The  selling,  which  became  general 
with  the  outbreak  of  war,  continued  on  so  large  a 


BALANCE  OF  TRADE  OF  UNITED  STATES    69 

scale  that  by  December,  1918,  no  less  than  approxi- 
mately 12,000,000,000  worth  of  American  securities 
held  abroad  in  1914  had  been  returned.  The  second 
method  by  which  American  capital  was  exported 
was  the  flotation  of  foreign  loans  in  the  United 
States  on  private  account.  A  very  large  part  of  the 
total  of  capital  thus  advanced  consisted  of  loans 
for  war  purposes.  The  balance  comprised  provin- 
cial and  municipal  loans,  largely  Canadian,  and 
railroad,  industrial,  and  public  utility  loans,  also 
chiefly  Canadian.  During  the  war  period  of  four 
and  a  half  years,  about  |1,520,000,000  of  American 
capital  was  exported  in  this  fashion. 

The  principal  method,  however,  by  which  the 
transfer  of  credits  was  effected  was  the  third.  Sub- 
sequent to  the  entry  of  the  United  States  into  the 
war  in  April,  1917,  American  lending  to  the  out- 
side world  chiefly  took  the  form  of  direct  loans  to 
the  Allied  nations  by  the  United  States  Govern- 
ment. Under  the  authority  of  the  legislation  which 
provided  for  the  establishment  of  credits  in  favor 
of  the  Allied  Governments,  the  United  States  made 
direct  advances  amounting  to  |7,319,500,000  prior 
to  December,  1918. 

We  may  now  summarize  the  foregoing  statement 
of  the  manner  in  which  American  trade  was 
financed  during  the  war  period.  The  enormous  ex- 
cess of  exports,  amounting,  as  stated  above,  to  $11,- 
800,000,000,  was  settled,  in  major  part,  by  the  ex- 
port of  American  capital  and,  in  a  lesser  degree, 
by  the  import  of  gold.    These  offsetting  factors  in 


70   INTERNATIONAL  TRADE  BALANCE 

the  aggregate  approximated  the  export  total,  as 
evident  from  the  following: 

Net  importation  of  gold  $1,029,000,000 

Securities  returned  from  Europe   2,000,000,000 

Private  foreign  bond  issues   1,520,000,000 

Advances   by   the  United   States   Government   in 

favor  of  tlie  Allied  Governments   7,319,500,000 


$11,868,500,000 


There  were  various  minor  factors  remaining 
which  cannot  be  disregarded.  The  shipping  situ- 
ation which  arose  as  a  result  of  the  war  led  to  the 
revival  of  the  American  merchant  marine  in  the 
foreign  trade.  This  is  reflected  in  the  fact  that  for 
the  period  under  review  freight  payments  receiv- 
able by  American  ships  almost  equaled  the  freight 
charges  payable  to  foreign  shipping  companies. 
That  this  shipping  account  did  not  show  a  net 
credit  in  favor  of  the  countiy  is  to  be  attributed  to 
the  fact  that  the  merchant  marine  did  not  attain 
its  largest  proportions  till  the  latter  part  of  the 
war  period.  There  was,  however,  a  considerable 
debit  charge  of  another  kind  against  the  United 
States  on  account  of  shipping.  It  is  estimated  that 
during  the  war  period  the  country  made  payments 
for  foreign  shipping  chartered  to  the  United  States 
to  the  extent  of  |261,000,000.  Although  during  the 
war  years  tourist  expenditures  were  negligible,  it 
is  estimated  that  immigrant  remittances  suffered 
little  if  any  reduction.  A  further  item  of  some  im- 
portance is  that  of  interest  payments.  In  view  of 
the  extraordinarily  rapid  export  of  American  cap- 


BALANCE  OF  TRADE  OF  UNITED  STATES    71 

ital  during  the  war  and  the  accompanying  with- 
drawal of  foreign  capital  from  the  United  States,  it 
was  quite  to  be  expected  that  the  interest  on 
American  capital  abroad  should  surpass  the  in- 
terest charges  on  foreign  capital  invested  in  that 
country.  This  credit  item  arising  from  the  excess 
of  interest  payments  receivable  was  nearly  large 
enough  to  offset  the  debits  on  account  of  shipping 
charges  and  immigrant  remittances.  In  the  final 
balance  for  the  war  years,  if  account  be  taken  of 
total  credits  and  debits,  including  both  the  trade 
and  invisible  items,  there  appears  a  net  debit  bal- 
ance of  about  1437,000,000.  "This  amount  is  prob- 
ably represented  by  the  increase  of  cash  balances 
of  foreign  banks  in  the  United  States,  which  are 
known  to  have  gi'own  notably  during  the  war,  by 
credits  advanced  and  not  used  within  the  period, 
by  merchandise  paid  for  and  not  exported  within 
the  period,  and  other  items  of  similar  nature."  ^ 

The  essential  features  of  the  balance  of  interna- 
tional payments  of  the  United  States  since  the  time 
of  the  Armistice  may  be  briefly  set  forth.  The 
merchandise  and  silver  trade  balance  has  been 
marked  by  a  continued  excess  of  exports,  although, 
as  stated  elsewhere,  on  a  declining  scale.  The 
United  States  Government  made  further  direct 
credit  advances  in  favor  of  foreign  governments 
amounting  to  approximately  |2,300,000,000.  The 
total  loaned  in  this  manner  by  the  American  Gov- 
ernment subsequent  to  April,  1917,  amounts,  there- 

^  Bullock,  Williams,  and  Tucker,  op.  cit.,  p.  252. 


72   INTERNATIONAL  TRADE  BALANCE 

fore,  to  nearly  |10,000,000,000.  With  the  reduction 
in  and  final  cessation  of  such  governmental  ad- 
vances, recourse  was  again  had  to  private  capital. 
It  has  been  estimated  by  Dr.  B.  M.  Anderson  tliat 
between  January  1,  1919,  and  September  15,  1920, 
private  advances  and  credits  to  the  amount  of 
13,500,000,000  were  accumulated  against  Europe.^ 
In  addition,  there  have  been  loans  and  investments 
in  Canada,  in  South  America,  and  elsewhere.  And 
finally,  in  this  connection  it  is  necessary  to  note 
that  there  have  been  large  accumulations  of  un- 
paid interest  upon  American  capital  loaned  to 
European  countries.  Moreover,  as  a  result  of  the 
expansion  of  the  American  merchant  marine,  the 
item  of  freight  payments  has  perhaps  passed  out 
of  the  debit  column.  In  any  event,  whether  or  not 
it  becomes  in  the  future  a  large  credit  item,  it  is  cer- 
tain that  for  a  time  at  least  the  balance  either  way 
will  not  be  relatively  large.  Although  the  expen- 
ditures of  American  tourists  abroad  are  much  re- 
duced for  the  present,  they  will  doubtless  surpass 
within  a  few  years  the  pre-war  level.  Immigrant 
remittances  are  probably  much  larger  than  be- 
fore. 

Returning  now  to  the  assertion,  which  has  al- 
ready been  made,  that  in  the  future  the  American 
balance  of  trade  must  undergo  a  further  transition, 
to  be  marked  thereafter  by  an  excess  of  imports, 
let  us  note  the  conditions  which  support  the  opin- 
ion.    The  appearance  of  this  anticipated  transi- 

^Andersoiij  The  Chase  Economic  Bulletin,  October  5,  1920. 


BALANCE  OF  TRADE  OF  UNITED  STATES    73 

tion  has  been  hastened,  it  was  contended,  by  cir- 
cumstances growing  out  of  the  war.  In  the  face 
of  the  unprecedentedly  large  export  balances  which 
have  marked  American  foreign  trade  since  1915, 
there  is  an  apparent  paradox  in  the  suggestion  that 
the  very  conditions  which  brought  about  this  re- 
markable export  situation  must  hasten  the  even- 
tual transition  to  a  trade  balance  marked  by  an 
excess  of  imports. 

The  notable  feature  of  the  pre-war  balance  of 
trade  was  an  excess  of  exports,  averaging  |597,- 
600,000  a  year,  during  1911-13,  exclusive  of  gold 
shipments.  This  served,  as  already  stated,  as  an 
offset  against  the  debit  balance  on  account  of  in- 
visible items.  The  outstanding  characteristic  of 
the  trade  balance  during  the  war  years  was  the 
astonishing  magnitude  of  the  excess  of  exports, 
averaging  |2,600,000,000  a  year.  Even  for  a  coun- 
try accustomed  to  large  export  balances  it  was 
extraordinary.  It  was  balanced,  as  we  have  seen, 
principally  by  the  export  of  American  capital. 

If  the  export  of  capital  from  the  United  States 
were  to  continue  to  be  sufficiently  large  to  maintain 
the  equation  of  indebtedness,  then  the  export  bal- 
ance might  be  expected  to  escape  substantial  re- 
duction. But  as  we  have  already  noted,  in  the  fore- 
going chapter,  no  nation  can  continue  indefinitely 
to  discharge  its  foreign  obligations  and  meet  the 
annual  payments  accruing  against  it  by  incurring 
new  debts.  In  time  the  annual  interest  charges 
must  exceed  the  new  capital  that  may  be  borrowed 


74   INTERNATIONAL  TRADE  BALANCE 

annually.  This  is  true  of  the  European  nations  as 
borrowers.  It  is  also  true,  on  its  reverse  side,  of 
the  United  States  as  a  lending  country.  The  ex- 
cess of  American  exports  cannot  be  viewed  as  a 
continuing  phenomenon  unless  there  be  a  large 
compensating  or  offsetting  debit  factor  in  the  form 
of  exports  of  capital.  This  is  so,  obviously,  be- 
cause the  United  States,  now  a  creditor  nation,  is 
the  recipient,  nominally  at  least  for  the  immediate 
present,  of  enormous  interest  payments  from 
abroad.  Sooner  or  later,  the  European  countries 
must  cease  buying  goods  on  credit  and  must  pay 
interest  on  their  foreign  debts,  and  to  do  this 
they  will  be  obliged  to  reduce  their  imports  and 
increase  their  exports. 

With  the  gradual  return  to  a  normal  basis 
of  trade,  the  adjustment  of  the  American  trade 
balance  to  the  new  set  of  conditions  will  be  secured. 
Already  the  movement  toward  normal  conditions 
has  begun.  The  United  States  Government,  under 
formal  pronouncement  in  January,  1920,  has  dis- 
continued the  practice  of  direct  advances  of  the 
Government  to  finance  European  countries  or  to 
finance  exports  to  Europe.  While  not  involving  the 
cessation  of  American  assistance  to  Europe,  it  does 
mean  the  substitution  of  private  for  public  financing 
of  exports.  Moreover,  the  unpegging  of  the  ex- 
changes and  the  lifting  of  the  American  embargo 
on  gold  in  1919  were  steps  in  the  movement  toward 
normal  conditions.  With  the  removal  of  the  other 
obstructing,  or  abnormal,  factors  the  anticipated 


BALANCE  OF  TRADE  OF  UNITED  STATES    75 

readjustment  in  the  trade  balance  will  be  hastened. 
The  present  situation,  so  far  as  the  American  bal- 
ance is  concerned,  may  be  briefly  summarized. 

The  total  of  foreign  capital  invested  in  the 
United  States  has  been  estimated,  it  will  be  re- 
called, at  about  |5,500,000,000  in  1914,  while  the 
amount  of  American  capital  invested  abroad 
equaled  about  |1,500,000,000  at  the  same  time.  As 
a  consequence,  the  United  States  was  then  a  net 
debtor  country  to  the  extent  of  about  |4,000,000,000 
and  on  that  account  it  was  subject  to  a  net  interest 
charge  of  about  |200,000,000  a  year.  This,  with 
other  items  of  indebtedness,  such  as  tourist  and 
immigrant  payments,  was  settled  by  an  excess  of 
exports  over  imports.  At  the  present  time,  on  the 
other  hand,  the  United  States  has  on  loan  abroad, 
in  some  form  or  other,  probably  |14,000,000,000. 
This  includes  the  credits  advanced  by  the  United 
States  Government,  the  capital  privately  loaned 
since  1914,  and  the  capital  already  invested  before 
the  war.  Against  this  there  is  probably  not  over 
11,000,000,000  of  foreign  capital  still  remaining  on 
investment  in  the  United  States.  The  country, 
therefore,  is  a  net  creditor  to  the  extent  of  about 
113,000,000,000.  The  net  interest  due  to  the  United 
States  amounts  to  about  |650,000,000  a  year.  This 
credit  amount  clearly  surpasses  the  net  debit 
chargeable  against  the  country  on  account  of  other 
invisible  items.  In  order  that  the  creditor  may  re- 
ceive his  interest,  this  should  mean,  therefore,  an 
excess  of  merchandise  imports  over  exports  for  the 


76    INTERNATIONAL  TRADE  BALANCE 

United  States,  unless  the  export  of  American  cap- 
ital (that  is,  loans  to  foreign  countries)  should 
continue  on  the  abnormally  large  scale  of  the  last 
few  years.    This,  however,  is  not  probable. 

Owing  to  the  war,  the  capital  and  interest  ac- 
count has  become  far  and  away  the  dominating 
item  in  the  American  balance  of  international  pay- 
ments. This  account  for  the  present,  however,  is 
subject  to  a  special  circumstance  whose  influence 
must  be  noted.  By  an  understanding  between  the 
United  States  Treasury  and  the  European  govern- 
ments concerned  it  was  decided  in  1920  to  fund  the 
credit  advances  of  the  Government  to  foreign  coun- 
tries. It  was  agreed,  moreover,  to  include  in  the 
funding  operation  not  only  the  credits  thus  ad- 
vanced, but  the  interest  payments  thereon  for  three 
years.  As  a  result  of  this  agreement,  interest  on 
the  government  advances  cannot  be  counted  as  a 
credit  item  in  the  balance  prior  to  1923.  At  any 
rate,  it  will  have  no  effect  upon  the  trade  balance 
before  that  date. 

The  result  of  the  postponement  of  the  interest 
payment  on  government  loans  till  1923  will  be  at 
once  apparent.  Net  interest  payments  on  private 
capital  represented  for  the  United  States  a  debit 
charge  of  about  |200, 000,000  annually,  during  the 
years  immediately  prior  to  the  war.  Net  interest 
payments  on  private  capital  now  represent  for  that 
countiy  a  credit  amounting  to  about  |150,000,000 
a  year.  It  is  probably  the  case  that  approximately 
11,000,000,000  of  American  private  capital  is  now 


BALANCE  OF  TRADE  OF  UNITED  STATES     77 

invested  abroad,  while  about  |1,000,000,000  of  for- 
eign capital  still  remains  in  the  United  States. 
The  net  interest  payment  on  private  capital  now 
receivable  by  the  United  States,  estimated  at  |150,- 
000,000,  is,  however,  not  sufficiently  large  to  coun- 
terbalance such  debit  items  as  immigrant  remit- 
tances, believed  to  be  much  larger  than  in  pre-war 
years,  tourist  expenditures,  and  miscellaneous 
charges.  As  a  consequence,  the  several  invisible 
items  taken  together  still  show  a  debit  balance 
against  the  country.  Moreover,  any  further  ad- 
vances of  credit  to  Europe,  either  publicly  or  pri- 
vately, or  any  increases  in  the  other  debit  items 
would  naturally  have  the  effect  of  increasing  this 
"invisible"  net  debit  balance.  For  the  present, 
therefore,  and  until  1923  at  least,  the  balance  of 
trade  will  continue  to  show  an  excess  of  exports 
over  imports,  although  doubtless  on  a  declining 
scale. 

But  under  the  present  arrangement,  the  interest 
payments  on  government  credits  will  make  their 
appearance  in  1923  in  the  balance.  By  that  time, 
the  total  of  government  advances,  including  both 
the  original  credits  and  the  unpaid  and  accumu- 
lated interest,  will  amount  to  somewhat  over  |12,- 
000,000,000.  The  annual  interest  charge  on  this 
will  exceed  |600,000,000.  When  this  is  added  to 
the  credit  side  of  the  balance  sheet  of  invisible 
items,  the  result  will  be  a  large  net  credit.  The 
total  of  net  interest  payments  receivable  by  the 
United  States  on  both  private  capital  and  public 


78   INTERNATIONAL  TRADE  BALANCE 

advances  will  amount  in  1923  to  probably  not  less 
than  1750,000,000.  Undoubtedly  changes  are  likely 
to  occur,  as  the  years  pass,  in  the  invisible  items 
other  than  interest  payments.  The  shipping  ac- 
count, as  a  result  of  the  expansion  of  the  merchant 
marine,  shows  a  small  net  credit  at  the  present 
time.  Its  future  is,  however,  uncertain  because  of 
changes  in  freight  rates  and  other  factors.  At  all 
events,  as  already  suggested,  the  item  of  freight 
payments  is  not  likely,  for  some  time  at  least,  to 
be  relatively  important.  Remittances  abroad  by 
immigrants,  now  much  above  the  pre-war  average, 
are  not  expected  to  increase  in  the  future.  And 
there  are  sound  reasons  for  believing  that  they  will 
recede  somewhat  from  the  present  level.  Tourist 
expenditures,  on  the  other  hand,  will  probably  in- 
crease rapidly,  and  very  substantially  surpass  the 
pre-war  figure.  The  net  result  will  probably  be 
the  emergence  of  a  large  net  credit  balance  on 
invisible  items,  on  account  of  the  interest  pay- 
ments which  will  be  receivable  subsequent  to  1923. 
This  will  mean  that  the  anticipated  overturn  in 
the  merchandise  trade  balance  will  then  be  not  far 
distant. 

The  adjusting  factor  must  naturally  be  the  rela- 
tive (gold)  price  levels  of  the  several  countries  con- 
cerned. European  prices  must  fall  relatively  to 
those  of  the  United  States,  in  order  that  European 
exports  to  the  latter  country  may  be  encouraged, 
and  European  imports  from  the  United  States  may 
be  discouraged.    By  this  means  only  will  Europe 


BALANCE  OF  TRADE  OF  UNITED  STATES    79 

be  able,  in  the  long  run,  to  meet  her  interest  obli- 
gations. 

It  is  quite  possible,  and  perhaps  probable,  that 
the  overturn  in  the  American  balance  of  trade  may 
be  attended  by  no  absolute  reduction  in  the  quan- 
tity  of  exports.  It  may  follow  as  a  result  of  a  more 
rapid  relative  increase  in  imports.  The  latter  may 
grow  up  to  and  surpass  the  exports.  But  change  in 
the  relative  importance  of  exports  and  imports 
there  must  be.  When  the  overturn  will  occur  will 
depend  on  changes  in  the  invisible  items  of  the 
balance.  Thus  a  moderate  annual  export  of  Amer- 
ican capital  for  foreign  investment  would  have  the 
effect  of  postponing  the  transition  in  the  balance 
of  trade.  For  this  and  other  possible  reasons  there 
is  ground  for  believing  that  it  may  not  appear  until 
the  later  twenties. 


CHAPTER  III 


THE    TRADE    BALANCE    OF    THE    UNITED    KINGDOM 


Having  observed  the  principal  features  of  the 
balance  of  trade  of  the  United  States,  the  great 
exporting  and,  until  very  recently,  debtor  coun- 
try, let  us  now  turn  to  a  consideration  of  the  trade 
balance  of  the  United  Kingdom,  the  great  import- 
ing and  creditor  nation.  The  relative  position  of 
these  two  in  their  respective  groups  may  be  noted 
in  the  following  summary  of  trade  conditions 
in  the  principal  capital-lending  and  borrowing 
countries. 


Foreign  Trade  of  Countries  That  Receive  a  Consideeabue 
Income  from  Their  Foreign  INVE|STME^"Ts  of  Capital;  dur- 
ing Calendar  Year,   1913^ 


Merchandise 

Excess  of  Im- 
ports   over 
Exports 

Country 

Imports 
(for  consump- 
tion) 

Exports 
(domestic) 

United  Kingdom  .... 

Germany 

France  

$ 
3,207,801,000 
2,563,354,000 
1,642,117,000 
1,574,990,000 
974,623,000 

$ 
2,556,106,000 
2,403,311,000 
1,326,950,000 
1,239,360,000 
717,152,000 

$ 
651,695,000 
160,043,000 
315,167,000 

The  Netherlands  .... 
Belgium    

335,630,000 
257,471,000 

"Statistical  Abstract  of  the  United  States,  1914,"  pp.  688,  689. 
80 


TRADE  BALANCE  OF  UNITED  KINGDOM     81 

Foreign  Trade  of  CoijiNrTRiEs  That  Have  Borrowed  Heavily 
FROM  Other  Countries;  during  Calendar  Year  1913 


Merchandise 

Excess  of  Ex- 

Country 

Imports 
(total) 

Exports 
( domestic ) 

ports    over 
Imports 

United     States'     (in- 
cluding Alaska,  Ha- 
waii,   and    Porto 
Eico)    

$ 

1,893,926,000 

594,521,000 

406,805,000 

93,020,000 

$ 

2,329,684,000 
792,359,000 
466,582,000 
129,971,000 

$ 
435,758,000 

India    (British)  '    ..  . 
Argentina  ^   

197,838,000 
59.777,000 

Mexico  ^  

36,951,000 

^  Figures  for  the  United  States  and  India  are  for  the  fiscal  year 
1913-14. 

2  For  Argentina  and  Mexico  the  export  figures  comprise  total  ex- 
ports. 

The  explanation  which  has  already  been  offered 
of  the  excess  of  exports  marking  the  balance  of 
trade  of  the  United  States  will  apply,  in  the  main, 
to  the  other  countries  in  the  capital-borrowing 
group.  On  account  of  the  large  accumulations  of 
foreign  capital  invested  within  their  borders,  these 
countries  are  subject  to  net  interest  payments 
abroad.  Certain  other  invisible  debits  also  con- 
tribute toward  the  necessity  of  an  offsetting  credit 
balance  of  merchandise  exports.  That  the  trade 
balances  of  the  capital-lending  countries  should  be 
marked  by  an  excess  of  imports  is  also  quite  to  be 
expected.  The  existence  of  their  balance  of  mer- 
chandise imports  is,  in  the  light  of  earlier  state- 
ments, to  be  viewed  as  presumptive  evidence  of  an 
excess  of  invisible  credits  over  debits. 

It  was  estimated  by  Sir  George  Paish  in  1910 
that  Great  Britain  had  at  that  time  about  |15,000,- 


82    INTERNATIONAL  TRADE  BALANCE 

000,000  of  capital  invested  abroad.  Germany  and 
France,  the  countries  then  standing  next  as  capital 
lenders,  had  about  |8,000,000,000  each  loaned 
abroad.  Although  the  foreign  investments  of  Hol- 
land and  Belgium  were  much  smaller  they,  never- 
theless, were  considerable.  These  importing  coun- 
tries, in  addition  to  their  receipt  of  interest  from 
abroad,  also  enjoyed  in  varying  degree  large  pay- 
ments on  account  of  shipping  sei'vices  and  tourist 
expenditures.  Prominent  among  the  other  im- 
porting countries  at  the  time  were  Switzerland, 
Norway,  Italy,  and  China.  A  large  excess  of  im- 
ports characterized  the  trade  balance  of  each  of 
these  countries  in  1913.  In  the  case  of  Switzer- 
land, Norway,  and  Italy  the  import  balance  is 
to  be  explained,  in  large  part,  respectively,  by 
tourist  expenditures,  merchant  marine  earnings, 
and  the  receipt  of  immigrant  remittances  from 
abroad.  The  import  balance  of  China  was  largely 
the  outcome  of  heavy  borrowing  of  foreign  capital. 
Canada,  likewise,  prior  to  the  war,  was  an  "im- 
mature" borrowing  country,  one  whose  annual  in- 
terest payments  abroad  were  still  exceeded  by  the 
new  capital  borrowed  each  year. 

It  may  be  well,  perhaps,  to  recognize  that  the 
investment  of  capital  abroad,  if  successfully  em- 
ployed, confers  benefits  on  the  borrowing  country 
no  less  than  upon  the  one  lending.  Indeed,  the 
benefit  enjoyed  by  the  former  nation  may  be  the 
greater.  So  long  as  capital  is  available  for  in- 
vestment wherever  in  the  world  the  best  opportuni- 


TRADE  BALANCE  OF  UNITED  KINGDOM    83 

ties  exist  for  the  development  of  industry  and  for 
the  increased  production  of  staple  goods  of  world- 
wide consumption,  it  will  not  be  a  matter  of  seri- 
ous concern  where  the  ownership  of  such  capital 
may  rest.  In  his  desire  to  emphasize  this  truth 
Mr.  George  E.  Roberts,  Vice-President  of  the  Na- 
tional City  Bank  of  New  York,  has  the  following 
to  say :  ^ 

"Suppose  a  resident  of  New  York  should  invest 
a  portion  of  his  surplus  income  in  an  industry  in  a 
distant  state — say,  California — which  is  about  as 
far  from  New  York  in  one  direction  as  Europe  is 
in  the  other.  And  suppose  the  industry  is  pros- 
perous, but  all  the  earnings  are  retained  in  it  for 
development.  It  grows,  it  gives  employment  to  an 
increasing  number  of  people,  the  product  is  a  useful 
article  which  enters  into  commerce,  the  income  is 
all  disbursed  where  the  works  are  located,  and  as 
they  grow  a  prosperous  community  grows  up 
around  them,  with  schools  and  churches  and  all  the 
appurtenances  of  civilized  life.  How  much  sig- 
nificance attaches  to  the  fact  that  the  title  to  the 
property  is  in  New  York?  This  is  not  a  purely 
imaginary  picture;  for  that,  substantially,  was  the 
way  England's  foreign  investments  were  being 
employed  before  the  war." 

So  long  has  the  balance  of  trade  of  the  United 
Kingdom  been  marked  by  an  excess  of  imports,  that 
we  have  come  to  look  upon  it  almost  as  an  imme- 
morial institution.    Nothwithstanding  its  apparent 

^  Roberts,  "Our  Obligations  to  Europe,"  an  Address  delivered  at 
the  Annual  Meeting  of  the  National  Institute  of  Social  Sciences, 
February  4,  1921. 


84    INTERNATIONAL  TRADE  BALANCE 

antiquity  and  magnitude,  however,  the  balance  of 
imports  is  an  outgrowth  of  the  past  century  only. 
It  was  almost  exactly  one  hundred  years  ago  that 
the  overturn  occurred  in  the  British  trade  balance. 
Prior  to  1823,  the  foreign  trade  of  the  United 
Kingdom  was  characterized,  in  general,  by  an  ex- 
cess of  exports.  Although  exact  information  relat- 
ing to  the  extent  and  nature  of  British  commerce 
before  1770  is  meager,  and  notwithstanding  the 
difficulty  of  making  a  thoroughly  satisfactory  com- 
parison of  exports  and  imports  during  the  years 
immediately  following,  it  is  still  possible,  however, 
to  trace  the  general  course  of  trade  from  1760  on- 
wards. An  important  element  of  difficulty  lies  in 
the  use  at  that  time  of  two  methods  of  ascertaining 
import  and  export  values.  The  values  of  imports 
were  given  as  "official" ;  that  term  representing  a 
calculation  from  the  quantities  "according  to  rates 
of  value  fixed  so  long  back  as  1694."  Imports  con- 
tinued to  be  valued  in  this  so-called  "official"  man- 
ner till  1854.  The  values  of  exports,  at  first  com- 
puted on  the  same  basis,  underwent  a  change  in 
1798.  In  that  year  the  policy  was  adopted  of  esti- 
mating exports  on  the  basis  of  their  "real"  value; 
the  term  "real"  representing  the  actual  value  of 
the  goods  derived  from  a  declaration  at  the  time 
of  exportation.  The  use  of  "real"  values  was  not 
extended  to  imports  until  1854.  It  is  obvious  at 
once  that  an  accurate  comparison  of  import  and 
export  statistics  prior  to  that  date  is  difficult,  if 
not  impossible,  owing  to  the  two  methods  of  com- 


TRADE  BALANCE  OF  UNITED  KINGDOM    85 

puting  values.  Attention  will  again  be  directed  to 
this  question  when  considering  the  balance  of  trade 
during  the  years  1798  to  1820. 

In  his  study  of  British  trade  in  this  early  period 
Mr.  Levi  has  presented  in  diagrammatic  form  the 
relation  between  exports  and  imports.  In  this  dia- 
gram, which  follows,  it  will  be  noted  that  the  com- 
merce of  England  is  treated  as  distinct  from  that  of 
Scotland  and  Ireland  prior  to  1778,  while  from  that 
time  on  to  1800  the  trade  of  Great  Britain  is  pre- 
sented as  isolated  from  that  of  Ireland. 

British  Imports  and  Exports  * 
1760-1820 


Imports    of    England 

and 
Exports  of  British 

and 

Foreign   Merchandise 

England 

1760-1778 


Imports  of  Great 

Britain 
Exports   of    British 

and 

Foreign  Produce  from 

Great  Britain 

1779-1800 


Imports  of  the  United 

Kingdom 

Official  Value 

Exports  of  the  United 

Kingdom 

British  Produce:  Real 

Value 

1801-1820 


17CC                        1770                         1780                         1790                         ICOO                         1310                          1820 
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1790  1800  1810  1820 


That  the  excess  of  exports  that  marked  the  trade 
of  England  in  1760  had  already  prevailed,  in  gen- 
eral, for  a  considerable  time  is  clear.  The  "official" 
value  of  English  exports  and  imports  in  certain 

^  Levi,  "History  of  British  Commerce,"  p.  27. 


86   INTERNATIONAL  TRADE  BALANCE 

typical  years  during  the  preceding  century  and  a 
half  is  set  forth  in  the  following  statement :  ^ 

Year  Exports  ( ,000  Omitted)      Imports  (,000  Omitted) 

£  £ 

1613  2,487 2,141 

1622  2,320 2,619 

1688  4,310 7,120 

1720  6,910 6,090 

1740  8,197 6,703 

1750  12,699 7,772 


Before  turning  to  a  consideration  of  the  over- 
turn which  occurred  in  1823  in  the  balance  of  trade 
and  to  its  subsequent  development,  let  us  take  note 
of  certain  conditions  which  contributed  toward  the 
early  balance  of  merchandise  exports.  The  factor 
of  prime  importance  was  probably  the  interna- 
tional movement  of  capital,  small  though  it  was  as 
compared  with  that  of  to-day. 

The  center  of  financial  and  commercial  energy  no 
less  than  the  star  of  empire  has  steadily  moved 
westward  through  the  centuries.  This  center  of 
economic  activity  was  first  located,  in  the  modern 
age,  in  northern  Italy,  whence  it  moved,  for  a  time, 
to  Spain  and  Portugal,  only  to  move  on  later  to 
Holland,  to  France,  and  to  England.  It  reached 
London  about  the  close  of  the  eighteenth  century. 
"London  was  then  the  only  market,"  Mr.  C.  K. 
Hobson  states,  "where  any  large  quantity  of  float- 
ing capital  was  available  to  supply  the  require- 
ments not  only  of  domestic  industry,  but  also  of 

^  Cunningham,  "Growth  of  English  Industry  and  Commerce  in 
Modern  Times,"  vol.  II,  Appendix  F, 


TRADE  BALANCE  OF  UNITED  KINGDOM    87 

foreign  governments  and  others."  ^  Industrial  de- 
velopment in  England  about  1800  was  more  ad- 
vanced by  a  generation  than  on  the  Continent,  and 
even  more  so  than  in  America.  It  was  British 
capital  chiefly,  for  thirty  years  or  more,  that  was 
available  for  the  economic  development  of  other 
countries.  It  flowed  toward  both  Europe  and 
America,  to  meet  the  financial  needs  of  govern- 
ments, to  make  possible  the  extension  of  transpor- 
tation facilities,  and  to  provide  for  the  evolution 
of  the  economic  organization. 

Although  the  origin  from  which  foreign  invest- 
ment arose  was  probably  in  commerce  and  while 
the  first  investors  in  foreign  enterprise  were, 
doubtless,  merchants,  it  was  inevitable  that  a  dif- 
ferentiation should  be  made  in  time  between  the 
business  of  finance  and  that  of  trade.  This  proc- 
ess of  specialization  or  differentiation  of  function, 
dating  back  to  the  Middle  Ages,  began  probably 
with  the  accommodation  afforded  by  the  wealthy 
to  princes.  The  next  phase  in  this  evolution  of 
modern  banking  appeared  in  loans  to  prosperous 
men  of  business.  Throughout  the  seventeenth  cen- 
tury the  principal  borrowers  were  princes  and  po- 
tentates, and  rich  merchants  who  had  the  means 
of  offering  sound  security.  The  process  was  as- 
sisted, in  the  course  of  time,  by  the  growing  multi- 
plicity of  the  financial  requirements  of  rulers  of 
states,  of  municipalities,  and  of  individual  and 
joint-stock  capitalistic   enterprises.      It   was  fos- 

1  Hobson,  "The  Export  of  Capital,"  p.  80. 


88   INTERNATIONAL  TRADE  BALANCE 

tered  also  by  the  increase  in  the  number  and  im- 
portance of  wealth-owners  other  than  merchants, 
men  willing  to  lend  their  capital  to  those  who  were 
in  a  position  to  use  it  productively.  The  purposes 
for  which  foreign  capital  was  borrowed  became 
as  wide  and  varied  as  the  area  over  which  the 
capital  was  spread. 

With  the  growth  of  modern  industrialism  and  its 
accompanying  expansion  in  the  means  of  communi- 
cation, progress  of  knowledge,  and  increase  in  gov- 
ernmental security,  the  number  of  persons  able  and 
willing  to  invest  abroad  rapidly  increased.  Such 
absentee  investment,  dating  from  the  operations 
of  the  Florentines  and  Jews  of  mediaeval  Europe, 
has  become  an  important  feature  of  modern  eco- 
nomic life.  As  an  example  of  the  early  lending 
transactions  we  may  note  the  loan  extended  to 
King  Henry  V  by  certain  Italian  merchants.  On 
May  13,  1404,  ''King  Henry  borrowed  1,000  marks 
from  ten  merchants  of  Genoa,  and  for  payment  he 
allowed  them  to  retain  the  duties  on  goods  to  be 
imported,  and  on  wool,  hides,  wool-fells,  cloth,  and 
other  goods,  to  be  exported,  by  them  in  London, 
Southampton,  and  Sandwich  for  four  months."  ^ 
Five  merchants  of  Florence  also  lent  him  500  marks 
on  the  same  terms.  "In  the  following  year  sums 
to  the  same  amount  were  lent  by  the  same  par- 
ties, and  on  the  same  terms."  Edward  IV  and 
Mary  obtained  considerable  loans  from  the  Han- 
seatic  League,  and  Elizabeth  borrowed  from  Dutch 

^  Macpheraon,  "Annals  of  Commerce,"  vol.  I,  p.  614. 


TRADE  BALANCE  OF  UNITED  KINGDOM    89 

merchants  resident  in  the  United  Kingdom  as  well 
as  from  lenders  in  Hamburg,  Cologne,  and  Ant- 
werp. On  the  other  hand,  British  capital,  on  oc- 
casion, was  loaned  abroad.  Thus  Queen  Elizabeth 
in  1576  extended  a  loan  of  £40,000  to  the  state  of 
Flanders. 

In  the  meantime,  with  the  growth  of  capital 
accumulation  and  the  multiplication  of  the  open- 
ings for  investment,  private  borrowing  as  well  was 
steadily  increasing.  It  was  stated  before  an  offi- 
cial body  in  1669  that  considerable  quantities  of 
foreign  funds  were  on  loan  privately  in  England.^ 
Much  of  the  capital  used  in  rebuilding  London  after 
the  conflagration  of  1666  was  said  to  be  Dutch. 
Toward  the  latter  part  of  that  century  a  large 
portion  of  the  capital  of  the  Bank  of  England  was 
subscribed  by  Dutch  investors. 

Gradually,  however,  the  financial  center  of 
gravity  was  moving  westward,  the  changes  in  this 
direction  during  the  eighteenth  century  being  no- 
ticeable. The  financial  requirements  of  the  British 
Government  became  greater  than  ever  before,  and 
the  principal  of  the  national  debt  increased  from 
16  millions  sterling  in  1702  to  520  millions  in  1802. 
Much  capital  was  also  necessary  for  the  construc- 
tion of  towns,  factories,  and  canals,  and  for  the 
development  of  agriculture  and  commerce.  While 
the  participation  by  foreigners  in  providing  funds 
for  these  varied  purposes  was  notable,  the  part 
taken  by  British  capital  became  relatively   more 

"Hobson,  "The  Export  of  Capital,"  p.  85. 


90    INTERNATIONAL  TRADE  BALANCE 

important  as  the  century  wore  on.  It  has  been 
estimated  that  Dutch  holdings  of  British  securi- 
ties amounted  in  1776  to  £59,000,000.^  Foreign  in- 
vestors also  held  considerable  quantities  of  stock 
of  the  East  India  Company,  South  Sea  Company, 
and  Bank  of  England. 

British  capital,  however,  was  not  entirely  en- 
gaged in  domestic  development,  nor  must  it  be 
assumed  that  the  investment  abroad  of  such  cap- 
ital was  of  negligible  proportions  before  the  nine- 
teenth century.  On  the  contrary,  so  early  as  1690 
exception  was  taken  in  certain  quarters  to  the  ac- 
tivities of  the  British  East  India  Company  on  the 
strictly  economic  ground,  that,  in  the  absence  of 
a  plethora  of  capital,  the  funds  employed  in  the 
Eastern  trade  might  be  much  more  usefully  used 
in  developing  the  resources  of  the  country  at  home. 
It  was  felt  that  while  the  profit  to  the  shareholders 
might  not  be  so  large  if  domestic  and  internal  de- 
velopments were  furthered,  the  advantage  to  the 
community  as  a  whole  would  be  greater.  Canals 
and  improved  roads  were  necessary,  land  was  in 
need  of  drainage,  and  many  manufactures  were 
suffering  for  want  of  capital,  at  a  time  when  the 
lucrative  trade  of  India  and  the  higher  interest  re- 
turns possible  in  Italy  and  France  were  attracting 
British  capital  abroad.  At  all  events,  colonial  ex- 
pansion, the  growth  of  trade,  and  the  foreign  in- 
vestment of  capital  went  hand  in  hand. 

As  the  position   of  the  British  money  market 

^Economist,  February  15,  1913,  p.  334. 


TRADE  BALANCE  OF  UNITED  KINGDOM    91 

steadily  became  stronger,  British  capital  was  bet- 
ter able  to  compete  with  that  of  Holland,  even  in 
the  domain  of  European  loans.  Thus,  in  1735,  a 
loan  of  1,000,000  crowns  was  made  by  a  group  of 
London  merchants  to  the  Emperor  Charles  VI  of 
Austria,  the  revenues  of  Silesia  being  hypothe- 
cated as  security.^  And  yet,  despite  the  attraction 
exerted  upon  British  capital  by  the  investment  op- 
portunities of  the  European  continent  and  by  the 
trade  of  the  colonies,  the  great  bulk  of  British  in- 
vestments still  continued  to  be  made  within  the 
country. 

The  situation  at  the  outbreak  of  the  European 
revolutionary  wars,  in  1792,  has  been  summarized 
by  Mr.  Hobson,  as  follows :  ^ 

"Holland  was  still  the  chief  financial  center  in 
which  capital  could  be  borrowed  for  foreign  loans 
and  other  enterprises  abroad.  But  she  was  soon 
to  be  displaced  by  London,  whose  resources,  though 
temporarily  drained  by  the  Seven  Years'  War,  and 
the  War  of  American  Independence,  were  con- 
stantly being  increased  through  the  rapid  growth 
of  trade  and  industry.  .  .  .  Small  as  was  the  ex- 
tent of  foreign  investment,  and  insignificant  as  were 
the  sums  invested,  when  compared  with  present- 
day  figures,  there  had  nevertheless  been  a  marked 
advance  upon  the  investments  of  the  seventeenth 
century." 

The  downfall  of  Amsterdam  as  the  chief  finan- 
cial market  of  Europe  was  now  near  at  hand.  Na- 
poleon's overthrow  of  the  Dutch  Republic,  together 

^  Martens,  Causes  Celebres,  p.   07. 

'  Hobson,  "The  Export  of  Capital,"  p.  93. 


92    INTERNATIONAL  TRADE  BALANCE 

with  the  imposition  of  a  heavy  indemnity,  and  the 
failure  of  the  Bank  of  Amsterdam,  had  the  effect 
of  leaving  London  supreme.  Yet,  because  of  the 
very  heavy  drain  of  capital  for  war  purposes  dur- 
ing this  period,  the  overseas  investment  of  British 
capital  proceeded  relatively  slowly.  Although  it  is 
estimated  that  |80,000,000  of  the  United  States  na- 
tional debt  was  held  in  Great  Britain  in  1807,^  and 
while  other  investments  abroad,  as  well,  were  being 
made,  the  net  movement  of  capital,  nevertheless, 
during  the  first  years  of  the  nineteenth  century  was 
still  into  rather  than  away  from  Great  Britain. 
Owing  to  the  troubled  condition  of  the  European 
continent  many  continental  investors  sent  their 
capital  to  England  for  safe-keeping,  where  it  was 
invested  in  a  variety  of  ways. 

Prior  to  the  close  of  the  Napoleonic  period, 
England  was  probably  subject  to  a  net  debit  charge 
on  account  of  foreign  investments  of  capital  taken 
in  conjunction  with  the  interest  payments  thereon. 
The  imports  of  foreign  capital  for  domestic  invest- 
ment had  far  exceeded,  during  the  preceding  cen- 
turies, the  export  of  British  capital  for  overseas 
investment.  By  reason  of  this  fact,  the  time  had, 
doubtless,  long  since  arrived  when  the  annual  in- 
terest charges  payable  by  England  had  begun  to 
surpass  the  annual  importation  of  new  foreign 
capital.  Taking  into  consideration,  therefore,  both 
the  imports  and  exports  of  capital,  and  the  accom- 
panying payments  of  interest  to  and  by  Great  Brit- 
^  Bacon,  Yale  Review,  November,  1900. 


TRADE  BALANCE  OF  UNITED  KINGDOM    93 

ain,  we  should  probably  find,  if  complete  data  were 
available,  that  a  net  annual  debit  on  this  account 
was  chargeable  against  the  country  about  the  time 
of  the  opening  of  the  nineteenth  century. 

At  the  close  of  the  Napoleonic  Wars,  Great 
Britain  was  able  "not  only  to  put  by  vast  amounts 
of  capital  for  her  own  internal  development,  but 
also  to  supply  a  powerful  stream  of  capital  to  assist 
her  less  wealthy  neighbors."  With  the  conclusion 
of  peace  in  1815  an  eager  rush  to  borrow  set  in 
and  the  great  money  markets,  particularly  that  of 
London,  were  flooded  with  new  capital  issues. 
From  this  time  onward  till  the  middle  of  the  cen- 
tuiy,  Great  Britain  was  the  only  country  in  a  po- 
sition to  lend  large  amounts  of  capital.  Subse- 
quent to  1815,  therefore,  the  net  movement  of  cap- 
ital was  increasingly  outward. 

There  is  a  second  invisible  item  in  the  British 
trade  balance  of  that  time  that  deserves  notice. 
Shipping  charges,  including  freights  and  other  ex- 
penses, probably  represented  a  net  debit  against 
England  prior  to  1750.  In  this  connection,  too, 
in  the  absence  of  complete  and  satisfactory  data  it 
becomes  necessaiy  to  rely  largely  upon  estimates. 
The  last  half  of  the  eighteenth  century  formed  the 
time  of  transition  during  which  British  maritime 
preeminence  was  attained. 

Although  British  seamen  had  already  acquired  a 
reputation  for  daring,  as  well  as  for  a  spirit  of  dis- 
covery and  effectiveness,  the  British  had  not  sup- 
planted the  Dutch  and  other  maritime  nations  as 


94    INTERNATIONAL  TRADE  BALANCE 

the  common  carriers  of  the  world's  commerce  be- 
fore the  middle  of  the  eighteenth  century.  Various 
attempts  had  been  made  for  centuries  to  build  up 
the  maritime  resources  of  Britain.  Navigation  Acts 
of  one  kind  or  another  were  passed  from  the  four- 
teenth century  onward.  It  was  during  the  reign 
of  Elizabeth  and  under  the  influence  of  Lord  Bur- 
leigh that  the  development  of  England's  maritime 
power  was  first  systematically  undertaken.  Bur- 
leigh left  no  side  of  the  industrial  or  commercial 
life  of  the  country  unaffected  in  his  attempt  to  in- 
crease both  the  amount  of  shipping  and  the  number 
of  seamen.  The  Navigation  Act  of  1651  was  di- 
rectly aimed  at  the  maritime  supremacy  of  the 
Dutch,  yet  it  would  appear  "that  the  Dutch  did 
not  suffer  perceptibly  during  the  seventeenth  cen- 
tury; their  industry  was  reinforced  to  an  even 
larger  extent  than  that  of  England  by  religious 
refugees,  and  it  was  not  till  the  first  years  of  the 
eighteenth  century  that  Holland  attained  the  zenith 
of  her  commercial  greatness.  At  that  time  she  was 
still  far  ahead  of  England  in  the  shipping  and  mari- 
time resources  at  her  command.  Though  England 
had  not  overtaken  her  rival,  she  had  been  gaining 
in  the  race.  English  shipping  had  developed 
enormously  during  the  latter  part  of  the  seventeenth 
century,  and  it  is,  of  course,  possible  that  the  Navi- 
gation Act  contributed,  along  with  other  causes, 
to  this  result."  ^     As  a  consequence  of  the  several 

*  Cunningham,  "Growth  of  English  Industry  and  Comm«rce  in 
Modern  Times,"  vol.  I,  p.  213. 


TRADE  BALANCE  OF  UNITED  KINGDOM    95 

wars  during  the  latter  part  of  the  eighteenth  cen- 
tury, England's  maritime  power  was  firmly  estab- 
lished. The  Dutch  had  suffered  heavy  losses  both 
in  the  East  and  the  West,  while  the  French  mari- 
time resources  had  been  put  to  a  severe  strain. 

The  item  of  shipping  charges,  at  first  a  debit 
against  England,  doubtless  came,  therefore,  to  be 
a  net  credit  to  the  advantage  of  the  country  about 
the  time  of  the  turn  of  the  nineteenth  century. 
With  the  continued  growth  of  British  shipping 
since  that  time,  this  credit  has  increased  to  large 
proportions. 

Reverting  to  the  diagram,  already  presented, 
showing  the  course  of  imports  and  exports  between 
1760  and  1820,  we  may  conclude  that  the  small 
excess  of  exports  that  normally  marked  British 
trade  prior  to  1800  was  occasioned  by  the  presence 
of  a  small  debit  balance  against  England  on  ac- 
count of  invisible  items.  The  principal  factors  in 
this  invisible  debit  account  were  the  payment  of 
interest  to  foreign  lenders  and  shipping  charges 
paid  to  the  Dutch  and  other  maritime  powers.  It 
is  estimated  that  in  1774  British  interest  pay- 
ments to  the  Dutch  alone  on  war  loans  subscribed 
by  the  latter  amounted  to  a  million  pounds  a  year.^ 
Foreigners,  moreover,  held  large  amounts  of  com- 
mercial and  industrial  stocks.  In  1762  the  total  of 
such  foreign  holdings  reached  £18,000,000,  on 
which  the  annual  interest  charges  amounted  to 
£750,000. 

*  Postlethwayt,  Dictionary  of  Commerce,  article  "Holland." 


96   INTERNATIONAL  TRADE  BALANCE 

It  will  be  recalled  from  the  diagram  that  the 
British  excess  of  exports,  during  this  early  period, 
attained  its  largest  proportions  during  the  later 
years.  To  some  degree  this  must  be  attributed  to 
British  participation  in  the  European  wars  and  the 
War  of  1812.  These  struggles  imposed  upon  Brit- 
ain a  not  inconsiderable  invisible  debit  charge,  in 
the  form  of  an  export  of  funds  for  the  purpose  of 
supporting  British  arms  abroad  or  rendering  loans 
and  other  help  to  allied  countries.  In  part,  too,  and 
especially  during  the  last  years  of  the  period,  the 
condition  is  to  be  attributed  to  a  withdrawal  of 
capital  from  England  by  foreign  lenders  and  to  the 
rapid  extension  of  British  loans  abroad.  As  evi- 
dence of  the  action  of  continental  investors,  we  may 
note  the  fact  that  between  1813  and  1815  the  hold- 
ings by  foreigners  of  the  British  national  debt 
were  reduced  by  £3,000,000.^  And,  about  the  same 
time,  as  already  suggested,  British  lending  abroad 
began  to  assume  proportions  hitherto  unprece- 
dented. In  consequence,  notwithstanding  the 
credit  item  growing  out  of  the  earnings  of  British 
sliips  at  this  time,  there  was  probably  a  net  invis- 
ible debit  balance  against  Great  Britain  during  the 
decade  or  more  preceding  1820. 

A  further  reason  for  the  comparatively  large 
excess  of  exports  that  characterized  British  trade 
during  the  twenty  years  following  1800,  lies  in  the 
new  policy  adopted  in  1798  of  computing  the  value 
of  exports  on  the  basis  of  their  declared  or  "real" 

"  Hobson,  "The  Export  of  Capital,"  p.  96. 


TRADE  BALANCE  OF  UNITED  KINGDOM    97 

values.  Hitherto,  as  already  stated,  both  exports 
and  imports  had  alike  been  valued  on  an  "official" 
basis,  on  the  scale,  that  is  to  say,  of  values  fixed 
in  1694,  Import  values  continued,  it  will  be  re- 
called, to  be  ascertained  on  this  basis  till  1854. 
The  change  introduced  in  1798,  however,  in  the 
process  of  computing  export  values  had  the  effect 
at  once  of  enlarging  the  statistics  of  exports,  inas- 
much as  the  general  level  of  British  prices  in  1798 
was  considerably  higher  than  that  of  1694. 

However,  the  very  conditions  which  gave  rise 
to  an  excess  of  merchandise  exports  at  the  moment 
were  destined  in  a  few  years  to  bring  about  an 
overturn  in  the  British  balance  of  trade.  With  the 
continued  growth  of  shipping,  the  item  of  freight 
payments  became  an  increasingly  important  credit 
factor  in  the  British  account.  With  the  subsi- 
dence of  the  investment  of  foreign  capital  in  Great 
Britain,  relatively,  at  all  events,  the  payment  of 
interest  abroad  became  a  less  weighty  debit  item. 
And  the  extraordinary  expansion  in  overseas  in- 
vestment of  British  capital,  which  began  in  1815, 
hastened  the  time  when  the  total  of  such  invest- 
ments would  be  so  large  that  the  annual  interest 
receipts  from  abroad  by  Britain  would  exceed  the 
new  annual  export  of  capital.  It  was  to  be  ex- 
pected, therefore,  that  the  invisible,  or  non-com- 
mercial, items  would  soon  begin  to  show  a  net 
credit  balance  in  favor  of  Great  Britain.  This  con- 
dition in  turn  would  lead  to  the  suggested  transi- 
tion in  the  trade  balance.     In  the  not  remote  fu- 


98    INTERNATIONAL  TRADE  BALANCE 

ture  there  would  emerge  an  excess  of  merchandise 
imports  which  thereafter  would  continue  indefi- 
nitely. 

The  change  which  appeared  in  England's  balance 
of  trade  has  been  commented  upon  concisely  by 
Mr.  Hartley  Withers.  Since  the  early  years  of  the 
nineteenth  century,  "the  account  has  been  compli- 
cated/' he  declares, 

"by  the  growth  of  the  amount  that  her  debtors  owe 
her  every  year  for  interest,  and  by  the  huge  earn- 
ings of  her  merchant  navy,  which  other  countries 
pay  by  shipping  goods  to  her,  so  that,  by  the  growth 
of  these  items,  the  trade  balance  sheet  has  been 
turaed  in  the  other  direction,  and  in  spite  of  her 
lending  larger  and  larger  amounts  all  over  the 
world  she  now  has  a  balance  of  goods  coming  in. 
Interest  due  to  England  and  shipping  freights  and 
the  commissions  earned  by  her  bankers  and  in- 
surance companies  were  estimated  before  the  war 
[1914]  to  amount  to  something  like  350  millions 
(pounds  sterling)  a  year,  so  that  she  was  able  to 
lend  other  countries  some  200  millions  or  more  a 
year  and  still  take  from  them  a  very  large  balance 
in  goods."  ^ 

That  the  overturn,  which  has  thus  been  de- 
clared to  be  impending,  did  in  fact  appear  shortly 
is  revealed  in  the  diagram  below.  Although  im- 
ports slightly  exceeded  exports  in  the  year  1823, 
it  was  not  until  1825  that  the  final  transition  oc- 
curred. From  that  year  onward  the  British  bal- 
ance of  trade  has  been  marked  by  an  excess  of 
imports. 

*  Withers,  "International  Finance,"  p.  83. 


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100       INTERNATIONAL  TRADE  BALANCE 

The  British  excess  of  imports  over  exports  be- 
came so  pronounced  by  1875  that  much  anxiety 
was  felt  in  many  quarters  lest  "it  should  be  an  evi- 
dence of  a  state  of  trade  disadvantageous  to  the 
economic  condition  of  the  country."  Can  it  be,  it 
was  asked,  "that  the  United  Kingdom  has  been 
pursuing  for  years  past  a  losing  trade,  and  that  at 
the  end  of  the  yearly  transactions  she  finds  herself 
in  debt  by  so  many  millions?"  There  was  no  evi- 
dence, however,  that  England  paid  for  this  excess 
of  merchandise  imports  in  bullion.  On  the  con- 
trary, during  the  years  1860  to  1878  the  net  move- 
ment of  gold  was  actually  into  England.  The  con- 
clusion reached  by  Mr.  Levi  was  that 

"the  best  way  of  ascertaining  whether  the  excess 
of  imports  into  the  United  Kingdom  indicates  a 
state  of  trade  disadvantageous  to  her  economic 
condition,  is  to  look  to  the  foreign  exchanges.  If 
England  did  really  owe  the  excess  to  foreign  na- 
tions, would  there  not  be  a  constant  excess  of  bills 
of  exchange  on  England  in  the  foreign  markets, 
and  would  not  the  exchanges  in  consequence  be  per- 
manently against  England?  But  the  exchanges  are 
generally  in  her  favor,  and  the  British  sovereign 
holds  its  own  against  the  money  of  all  other  coun- 
tries. There  is  no  reason,  therefore,  for  any  anxi- 
ety respecting  the  balance  of  trade  in  so  far  as 
the  United  Kingdom  is  concerned."  ^ 

The  general  soundness  of  this  conclusion  is  at- 
tested by  the  experience  of  the  four  decades  since 

^Levi,  "History  of  British  Commerce,"  p.  502. 


TRADE  BALANCE  OF  UNITED  KINGDOM  101 

it  was  voiced.  The  excess  of  imports  has  in  general 
increased  with  the  years.  During  the  six  years 
preceding  the  World  War,  1908-13  inclusive,  the 
excess  of  merchandise  imports  over  exports,  ex- 
clusive of  bullion  and  specie,  averaged  in  value  ap- 
proximately 1685,000,000  a  year.^  It  is  at  once  evi- 
dent that  such  enormous  balances  could  not  well 
have  been  paid  by  England  in  gold.  And,  as  if 
further  to  support  the  general  conclusion,  the  ac- 
tual net  movement  of  gold  and  silver  bullion  and 
specie  was  into  the  United  Kingdom  rather  than 
out  of  the  country  during  these  same  years.  Thus, 
during  the  period  1908-13,  there  was  an  excess  of 
imports  of  bullion  and  specie  over  exports  of  the 
same  averaging  approximately  |24,000,000  per  an- 
num. There  was,  therefore,  not  only  an  absence 
of  any  drain  of  gold  from  Britain  to  settle  the  large  < 
debit  against  the  counti*y  on  account  of  merchan- 
dise trade,  but,  on  the  contrary,  there  was  actually 
a  considerable  net  inflow  of  gold.  We  are  led, 
therefore,  to  anticipate  that  in  the  case  of  the 
United  Kingdom  there  must  have  been  at  the  time 
a  large  excess  of  invisible  credits  over  invisible 
debits.  The  presence  of  such  a  net  balance  of  in- 
visible credits  would  serve  to  explain  both  the  ex- 
cess of  visible  or  trade  debits  and  the  import  of 
bullion  and  specie. 

It  is,  of  course,  clear  that  the  following  diagram 
is  not  rigidly  comparable  in  all  details  to  the  one 

*  British  money  throughout  this  chapter  will  be  converted  at  the 
rate  of  $4.90  per  f . 


102       INTERNATIONAL  TRADE  BALANCE 

wliich  depicts  British  trade  during  1821  to  1878. 
For  the  period  since  1878  total  British  exports,  in- 
clusive of  re-exports,  are  considered,  for  the  period 

Total  Imports  and  Total  Exports   of  the  United  Kingdom, 
1879  to  1913.      (Bullion  and  Specie  included) 


800 


700 


600 


500 


400 


300 


200 


Imports 
Exports 

1 

• 

a/ 

J 

/v 

1 

1 
1 

1 

1 

1 
1 

J 

/ 

^ 

A/ 

1 

/ 

A 

f 

l\J 

^ 

/ 
J 

1 
1 

/ 

/ 

/ 

/ 

v./ 

/ 

1875 


800 


700 


600 


500 


400 


300 


200 


1880 


1885 


1890 


1895 


1900 


1905 


1910 


1915 


before  1878  exports  of  British  produce  only  enter 
into  the  computation.  The  essential  fact,  however, 
is  strikingly  revealed  that  the  disparity  between 
imports  and  exports  has  persisted  without  inter- 


TRADE  BALANCE  OF  UNITED  KINGDOM  103 

ruption  since  1825,  becoming,  in  the  main,  more 
pronounced  through  the  centuiy. 

The  connection  between  the  British  balance  of 
trade  marked  by  an  excess  of  imports  and  the 
credit  balance  in  favor  of  Britain  on  account  of 
invisible  items  has  been  commented  upon  by  Mr. 
Edgar  Crammond. 

"It  is  difficult  to  avoid  the  conclusion,"  he  de- 
clared in  1911,  "that,  so  long  as  we  [the  British] 
remain  the  greatest  creditor  nation  in  the  world, 
i.  e.,  so  long  as  we  continue  the  investment  of  cap- 
ital abroad  on  the  present  scale,  so  long  as  we  do 
two-thirds  of  the  carrying  trade  of  the  world  and 
seventy  per  cent  of  the  international  banking  busi- 
ness of  the  world,  it  will  be  impossible  to  prevent 
the  importation  of  food-stuffs,  raw  materials,  and 
manufactured  goods,  having  an  aggregate  value 
greatly  in  excess  of  the  commodities  exported,  un- 
less we  re-invest  abroad  the  whole  of  our  earnings 
from  these  sources."  ^ 

Accordingly,  inasmuch  as  the  world's  production 
of  gold  totaled  in  1911  about  |450,000,000,  it  would 
not  be  possible,  he  added,  to  obtain  full  payment 
in  gold  for  these  services,  which  then  had  a  value 
of  about  11,500,000,000  per  annum,  even  if  the 
British  people  desired  it.  It  was  inevitable,  there- 
fore, that  the  British  should  accept  payment  in  the 
form  in  which  the  foreign  debtors  could  best  make 
it,  and  of  which  the  British  could  make  good  use, 

^Crammond,  "British  Investments  Abroad,"  The  Quarterly  Re- 
view, vol.  215,  p.  58. 


104       INTERNATIONAL  TRADE  BALANCE 

namely,  in  imports  of  food-stuffs,  raw  materials,  or 
manufactured  goods. 

In  attempting  to  construct  a  trade  balance  sheet 
for  Great  Britain,  attention  will  first  be  directed 
to  the  visible  or  trade  factors.  Following  the  plan 
adopted  in  the  preceding  chapter,  when  consider- 
ing the  case  of  the  United  States,  our  undertaking 
will  concern  itself  chiefly  with  the  three-year 
period,  1911-13. 

Merchandise  imports  into  the  United  Kingdom 
averaged,  in  value,  |3,580,000,000  per  annum  dur- 
ing these  years,  while  exports  had  an  average  an- 
nual value  of  12,920,000,000.1  The  excess  of  im- 
ports of  goods  was  equal,  therefore,  to  about  |660,- 
000,000  a  year.  Imports  of  gold  and  silver  during 
these  years  had  an  average  annual  value  of  |337,- 
000,000,  while  the  export  of  these  articles  averaged 
1300,000,000.  The  net  movement  of  gold  and  silver 
was  accordingly  into  Britain  to  the  extent  of  |37,- 
000,000  a  year.  As  a  consequence,  there  was  a 
total  visible  debit  balance  of  about  |700,000,000  a 
year  against  the  country  during  the  period,  on  ac- 
count of  trade  in  merchandise  and  bullion.  In  the 
light  of  the  foregoing  we  should  expect  to  find  a 
credit  balance  of  invisible  items  approximating 
three-quarters  of  a  billion  dollars. 

Prominent  among  the  invisible  factors  to  the 
credit  of  the  United  Kingdom  is  the  receipt  of  in- 
terest on  British  capital  invested  overseas.    It  was 

'  Compiled  from  "Statistical  Abstract  for  the  United  Kingdom, 
1917,"  p.  75. 


TRADE  BALANCE  OF  UNITED  KINGDOM  105 

estimated  by  Sir  Robert  Giffen  in  1898  that  Britain 
was  then  deriving  about  |450,000,000  per  annum 
in  the  form  of  interest  from  abroad.  In  the  opin- 
ion of  Sir  George  Paish,  the  British  people  were 
receiving  in  1907  approximately  |675,000,000  from 
their  foreign  investments.  The  export  of  large 
amounts  of  additional  capital  was  continued,  how- 
ever, with  the  result  naturally  that  the  interest 
receipts  expanded  also.  According  to  the  estimate 
of  Paish,  during  the  three  years  following  1907 
Great  Britain  supplied  other  lands  with  a  total 
of  new  capital  amounting  to  |2,400,000,000.  It  was 
his  conclusion,  expressed  in  1911,  that  "if  allow- 
ance be  made,  on  the  one  hand,  for  the  foreign  cap- 
ital employed  in  British  companies  both  at  home 
and  abroad  and  in  British  loans,  and,  on  the  other, 
for  the  vast  amount  of  private  capital  which  the 
British  people  have  placed  abroad,"  the  "net  total 
of  our  investments  in  other  lands  would  be  not 
much  short  of  £3,500,000,000."  ^  However,  owing 
to  the  difficulty  of  ascertaining  the  total  amount  of 
British  capital  privately  invested  abroad,  Paish 
contented  himself  in  his  study  with  the  investments 
for  which  there  was  documentary  evidence.  This 
total  he  placed  at  £3,191,800,000,  or  approximately 
115,250,000,000.  The  export  of  capital  did  not  suf- 
fer abatement  until  the  outbreak  of  the  war.  Ac- 
cepting the  foregoing  total  as  substantially  accu- 
rate for  the  year  1910,  we  may  conclude  that  British 

*  Paish,    "Great    Britain's    Capital    Investments,"    Journal    of 
Royal  Statistical  Society,  January,   1911. 


106       INTERNATIONAL  TRADE  BALANCE 

foreign  investments,  by  1914,  amounted  to  about 
117,500,000,000.  The  interest  annually  payable  to 
the  British  people  on  this  vast  sum  was  probably 
not  less  than  $900,000,000  during  that  year. 

This  enormous  accumulation  of  British  capital 
abroad  was  the  result  of  a  long-continued  export  of 
funds.  The  outward  movement  of  capital,  as  al- 
ready intimated,  has  been  especially  marked  since 
1815.  It  has  not  been  uniform,  however,  revealing 
at  times  rather  sharp  fluctuations.  These  varia- 
tions in  the  quantity  of  capital  invested  abroad  have 
occurred  as  a  natural  result  or  accompaniment  of 
changes  in  general  economic  conditions  both  at 
home  and  abroad.  The  large  wave  of  capital  ex- 
ports during  the  early  seventies  gave  way  during 
the  years  1876-78  to  an  actual  import  of  capital,  the 
securities  acquired  in  earlier  years  being  either 
sold  to  foreigners,  or  not  replaced  upon  redemp- 
tion by  new  investments.  The  reviving  efflux  of 
capital  of  the  eighties  culminated  in  1890,  after 
which  it  fell  off,  though  not  uniformly,  till  1901. 
After  the  slump  following  the  South  African  War 
capital  exports  again  increased,  reaching  an  un- 
precedented scale  from  1906  onwards  till  1914. 

Of  the  total  volume  of  British  capital  invested 
abroad  by  1910  approximately  fifty-one  per  cent 
had  been  supplied  to  foreign  countries  and  forty- 
nine  per  cent  to  countries  of  the  empire.^  The 
country  which  had  received  the  largest  amount  was 

*  Paish,  "Great  Britain's  Capital  Investments,"  Journal  of  Royal 
Statistical  Society,  January,  1911. 


TRADE  BALANCE  OF  UNITED  KINGDOM  107 

the  United  States,  where  forty-two  per  cent  of  the 
aggregate  of  British  investments  in  foreign  coun- 
tries was  located.  The  next  largest  recipients  of 
British  capital  were  Canada,  India,  South  Africa, 
Australia,  and  Argentina. 

During  the  three  years  under  review,  1911-13, 
the  income  of  the  British  people  in  the  form  of  in- 
terest on  foreign  investments  probably  averaged 
$850,000,000  a  year.  This  figure  is  somewhat  less 
than  that  stated  above  as  representing  the  income 
from  foreign  investments  in  the  year  1914.  The 
reason  for  this  lies  in  the  obvious  fact  that  the 
average  for  the  years  1911-13  would  naturally  be 
less  than  the  figure  for  the  later  year,  owing  to 
the  continued  growth  meanwhile  of  British  foreign 
investments,  which  in  turn  would  cause  a  gradual 
expansion  in  the  volume  of  interest  payments. 

The  receipt  of  interest  from  abroad  by  the  British 
people  has,  of  course,  its  offsetting  counterpart  in 
the  outgo  of  interest  from  the  United  Kingdom  to 
foreign  lenders  of  capital  invested  within  the 
country.  This  item,  however,  is  relatively  small,  as 
is  also  the  volume  of  foreign  capital  annually  im- 
ported for  employment  in  Britain.  Yet  it  is  true 
that  a  considerable  increase  occurred  during  the 
years  preceding  the  war  both  in  the  number  of 
foreign  banks  with  branches  in  London,  and  in 
the  volume  of  foreign  accounts  held  by  English 
banks.  Foreign  business  firms  operating  in  Britain 
also  became  more  numerous.  In  the  main  it  may 
be  assumed,  however,  that  the  two  comparatively 


108   INTERNATIONAL  TRADE  BALANCE 

unimportant  factors,  the  import  into  England  of 
foreign  capital  and  the  outgo  of  interest  payments, 
approximately  balanced  one  another.  They  may, 
therefore,  be  disregarded  in  the  balance  account. 
An  important  element  closely  related  to  that  of 
interest  payments,  which  cannot  be  neglected,  is 
the  annual  export  of  new  British  capital.  This 
item  naturally  is  counted  as  a  debit  rather  than  a 
credit,  owing  to  the  fact  that  a  loan  abroad  con- 
veys to  the  foreign  borrower  a  claim,  at  the  time, 
on  the  goods  or  services  of  the  lending  country. 
During  the  two  years  1909  and  1910  new  or  addi- 
tional capital  supplied  by  Britain  to  overseas 
countries  amounted  according  to  Paish,  to  $900,- 
000,000  per  annum.  This  outward  movement  of 
capital  assumed  still  larger  proportions  during 
the  years  immediately  following.^  It  is  probable 
that  not  less  than  |1,000,000,000  of  capital  was  an- 
nually invested  abroad  during  the  period  under 
review.  Taking  into  account  the  movement  of  in- 
terest and  capital  into  the  United  Kingdom  and 
that  of  interest  and  capital  out  of  the  country,  the 
result  was  a  net  debit  against  Britain  amounting 
to  about  1150,000,000  a  year.  This,  it  is  obvious, 
represents  the  excess  value  of  capital  exports  over 
interest  receipts. 

An  important  factor  concerning  which  informa- 
tion is  meager  is  the  repayment  of  old  loans.  It  can 
scarcely  be  assumed  that  in  all  cases  where  loans 

*See  Hobson,  "The  Export  of  Capital,"  and  Withers,   "Inter- 
national Finance." 


TRADE  BALANCE  OF  UNITED  KINGDOM  109 

of  capital  are  repaid  the  entire  proceeds  will  be  at 
once  reinvested  abroad.  On  the  other  hand,  the 
estimate  of  Professor  J.  A.  Todd  ^  that  approxi- 
mately 1500,000,000  of  income  accrued  to  the 
British  people  during  1913  through  the  withdrawal 
of  British  capital  from  foreign  investment  ap- 
pears somewhat  excessive.  Thus  it  has  been  esti- 
mated, although  admittedly  subject,  it  is  true,  to 
a  considerable  margin  of  error,  that  during  the 
first  nine  months  of  the  war,  August,  1914,  to  May, 
1915,  there  was  a  net  import,  into  the  United 
Kingdom,  of  British  capital  from  abroad  amount- 
ing to  about  1500,000,000.-  In  view  of  the  highly 
critical  state  of  affairs  during  that  nine-month 
period  and  the  severe  strain  on  England's  financial 
resources,  it  is  natural  to  look  upon  that  sum  as 
quite  beyond  the  normal  figure.  And  yet,  not- 
withstanding the  abnormal  conditions  which,  pre- 
sumably, made  it  unusually  large,  it  was  only  some 
thirty  per  cent  larger  than  that  suggested  for 
1913.  It  is  scarcely  likely,  therefore,  that  the  re- 
turn of  capital  incident  to  the  repayment  of  old 
loans  reached  so  large  an  amount  as  $500,000,000 
per  annum  during  the  years  1911-13.  In  the  ab- 
sence of  conclusive  data  it  may  be  estimated  that 
the  income  of  the  British  people  on  this  account 
averaged  not  over  |200,000,000  a  year.=^ 

'Todd,  "The  Mechanism  of  Exchange,"  p.   185. 

"  Hobson,  "The  War  and  British  Foreign  Investments,"  The 
Economic  Jov/mal,  June,  1915. 

'  It  may  be  noted  in  passing  that  Professor  Todd  estimated  the 
interest  received  by  the  British  people,  in  1913,  on  their  capital 


no   INTERNATIONAL  TRADE  BALANCE 

As  has  been  stated  already,  the  earnings  of  the 
British  merchant  marine  in  ocean  transport  serv- 
ice throughout  the  world  represent  an  important 
credit  item.  According  to  the  estimate  of  Giffen  in 
1898,  this  amounted  to  about  |450,000,000  per  an- 
num. An  independent  calculation  by  the  British 
Board  of  Trade  on  quite  different  lines,  in  1903, 
made  it  only  slightly  less.  In  considering  this 
item  it  is  necessary  to  bear  in  mind  the  important 
fact  that  in  the  Board  of  Trade  returns  the  values 
of  imports  include  cost,  insurance,  and  freight; 
whereas  the  values  of  exports  include  cost  and  only 
the  charges  of  delivery  on  board  ship.  That  is  to 
say,  the  exports  are  entered  in  the  trade  statistics 
on  the  value  basis  of  "Free  on  Board,"  or  F.O.B., 
while  imports  are  valued  on  the  basis  of  "Cost,  In- 
surance, and  Freight,"  or  C.I.F.  As  a  result  of 
this  practice  an  apparent  mystery  arises  in  the 
fact  that  the  statistics  of  the  world's  total  of  ex- 
ports are  less  than  for  the  world's  total  of  imports. 
Obviously  this  is  impossible,  for  it  cannot  be  be- 
lieved that  more  goods  arrive  in  port  than  ever 
set  sail.  The  Board  of  Trade  explanation  must 
be  taken  that  the  balance  is  to  be  accounted  for  by 

invested  abroad  at  about  $600,000,000.  This  estimate  is  $250,- 
000,000  less  than  that  of  the  writer.  The  combined  income,  how- 
ever, derived  from  the  two  sources,  interest  on  foreign  loans  and 
repayment  of  old  loans,  amounted  in  the  opinion  of  Professor 
Todd  to  only  slightly  less  than  the  estimate  reached  in  this  study. 
Tt  is  quite  possible  that  in  Professor  Todd's  investigation  certain 
amoimts  were  looked  upon  as  repayments  of  loans  which,  in  this 
estimate,  have  been  treated  as  interest. 


TRADE  BALANCE  OF  UNITED  KINGDOM  111 

shipping  charges;  costs,  that  is  to  say,  incurred 
after  the  goods  have  left  any  shore  as  exports. 
The  Board  of  Trade  in  1903  found  an  excess  value 
of  the  world's  imports  over  exports  of  about  |1,- 
120,000,000.  It  was  looked  upon  as  representing 
freights,  insurance,  and  certain  incidental  charges, 
such  as  harbor  dues,  cost  of  stores  purchased 
abroad,  etc.  After  making  adequate  deductions  to 
cover  these  incidental  charges  and  also  the  earnings 
of  the  ships  of  the  British  overseas  countries,  the 
Board  of  Trade  arrived,  as  mentioned  above,  at  a 
figure  only  slightly  less  than  |450,000,000,  as  the 
share  to  be  credited  in  1903  to  the  merchant  marine 
of  the  United  Kingdom.  While  subject  to  fluctua- 
tions from  time  to  time,  owing  to  variations  in 
freight  rates  and  changes  in  the  general  condition 
of  world  trade,  this  item  of  shipping  earnings 
tended  to  increase,  especially  after  1909.  It  is 
probable  that  during  the  period  under  review  it 
averaged  not  less  than  |500,000,000  a  year. 

Among  the  remaining  factors  in  the  invisible  ac- 
count the  principal  one  is  the  income  derived  by 
the  United  Kingdom  in  return  for  the  services 
rendered  to  foreign  countries  by  British  banks, 
commission  houses,  and  insurance  companies.  The 
vast  business  transacted  through  London  on  this 
account  is  paid  for  in  the  same  way  as  any  other 
goods  or  services  rendered.  These  earnings 
amounted,  it  is  estimated,  to  about  |125,000,000 
per  annum  during  the  years  under  consideration. 
Lesser  credit  items  appear  in  the  form  of  govern- 


112       INTERNATIONAL  TRADE  BALANCE 

ment  services,  chiefly  on  account  of  India,  the  sale 
abroad  of  old  ships,  as  yet  not  included  in  the  of- 
ficial trade  statistics,  and  private  remittances,  par- 
ticularly from  India,  America,  and  Australia.  In 
the  opinion  of  Mr.  Hobson  the  net  sum  to  be  cred- 
ited to  the  United  Kingdom  under  these  heads  was 
approximately  |70,000,000  during  the  year  1912.i 
Inasmuch  as  that  was  the  middle  year  of  our  three- 
year  period,  the  figure  $70,000,000  may  be  taken, 
therefore,  as  roughly  representing  the  annual  aver- 
age. 

Attention  has  been  directed  in  an  earlier  connec- 
tion to  the  so-called  "boarding  expenses,"  the  ex- 
penditures incurred  abroad  by  tourists  and  other 
travelers.  While  it  is  not  possible  to  calculate 
definitely  the  amount  annually  spent  abroad  by 
British  tourists,  or  the  sums  annually  expended 
within  the  United  Kingdom  by  colonial  and  foreign 
tourists,  it  has  none  the  less  been  estimated,  on  the 
basis  of  the  data  available,  that  for  Britain  these 
two  claims  roughly  balanced  one  another  in  1913  at 
about  150,000,000  a  year.  There  are  various  other 
minor  items  concerning  which  the  available  infor- 
mation is  meager.  For  one  of  them,  however,  it  is 
possible  to  offer  an  estimate  not  altogether  with- 
out merit.  The  amount  of  capital  carried  out  of 
Britain  by  emigrants  may  be  roughly  calculated. 
The  net  excess  of  British  emigrants  from  the 
United  Kingdom  over  British  immigrants  into  the 
country  averaged  about  270,000  a  year  during  the 
*  Hobson,  "The  Export  of  Capital,"  p.  196, 


TRADE  BALANCE  OF  UNITED  KINGDOM  113 

period  in  hand.  It  has  been  estimated  by  the 
United  States  Bureau  of  Immigration  that,  during 
the  years  1909-13,  the  per  capita  amount  of  money 
held  by  immigrants  arriving  in  the  United  States 
from  the  British  Isles  was  |82.00.  If  this  figure 
be  taken  as  a  basis  of  calculation  it  will  appear  that 
approximately  |20,000,000  of  money  was  carried 
out  of  the  country  annually  by  emigrants.  More- 
over it  may  be  assumed  that  the  personal  and  other 
effects  belonging  to  these  outgoing  settlers  had  in 
general  a  value  equal  to  not  less  than  one-half  the 
value  of  the  money  carried.  The  net  annual  debit 
against  the  country  on  account  of  emigration 
amounted,  therefore,  according  to  this  estimate, 
to  about  130,000,000. 

It  remains  now  to  sum  up  the  result  of  these 
various  elements,  both  visible  and  invisible,  which 
go  to  make  the  trade  balance  sheet  of  the  United 
Kingdom. 

(Figures    denote    millions,    and    annual    averages    for    the    years 
1911-1913) 


Visible  Credits 
Merchandise  exports    ....  $2,920 
Exports  of  gold  and  silver      300 


Visible  Debits 
Merchandise   imports    ....$3,580 
Imports  of  gold  and  silver      337 
$3,917 


$3,220 
Average  annual  excess  of  Visible  Debits $697 


Invisible  Credits 

Interest  on  loans  abroad.  .$  850 

Repayment  of  old  loans . . .  200 

Shipping  receipts    500 

Commissions,  banking,  etc.  125 
Sale   of    old    ships,   remit- 
tances, etc 70 

Boarding  expense  receipts  50 


$1,795 


Invisible  Debits 

New  loans  abroad   $1,000 

Capital     carried     by     emi- 
grants            30 

Boarding   expense   charges.      50 


$1,080 


Average  annual  excess  of  Invisible  Credits $715 


114       INTERNATIONAL  TRADE  BALANCE 

It  was  naturally  not  to  be  expected,  for  reasons 
more  or  less  obvious,  that  an  exact  balance  would 
be  reached.  There  were  various  lesser  items  of  the 
account  that  were  entirely  disregarded,  owing  to 
the  absence  of  adequate  information.  Moreover, 
many  of  the  figures  presented  above  admittedly 
partake  of  the  nature  of  rough  approximations. 
The  foregoing  statement,  however,  does  indicate  the 
vast  credits  that  annually  accrued  to  the  country 
as  a  result  of  its  investments  abroad,  its  shipping 
and  its  banking  business.  It  has  the  effect,  too, 
of  supporting,  from  British  experience,  the  con- 
tention advanced  elsewhere  that  in  every  country 
there  is  a  persistent  tendency  toward  an  approxi- 
mate equivalence  between  total  credits  and  debits. 

That  the  war  has  had  an  effect  upon  the  course 
of  British  commerce  and  on  the  nature  of  the 
balance  of  trade  is,  of  course,  to  be  expected.  Con- 
sidering both  the  vastness  of  the  financial  opera- 
tions incident  to  the  war  and  the  important  part 
taken  by  Britain  in  financing  certain  of  her  allies, 
it  could  not  have  been  otherwise. 

The  most  obvious  effect  of  the  war,  perhaps,  on 
British  trade  appeared  in  the  enormous  increase  in 
imports,  the  practically  stationary  condition  of  ex- 
ports, and  the  consequent  sharp  increase  in  the  ad- 
verse trade  balance.  During  the  last  three  calen- 
dar years  of  the  war,  1916-18,  the  excess  of  merchan- 
dise imports  over  exports  reached  the  vast  total  of 
about  12,600,000,000  per  annum.  This  figure,  it 
will  be  noted,  is  almost  exactly  four  times  larger 


TRADE  BALANCE  OF  UNITED  KINGDOM  115 

than  the  corresponding  total  for  the  three  pre-war 
years,  1911-13. 

To  meet  her  obligations  growing  out  of  this 
vastly  increased  volume  of  imports,  it  was  neces- 
sary for  Great  Britain  to  have  recourse  to  a  variety 
of  means.  British  holdings  of  foreign  securities 
were  sold  in  considerable  part,  a  large  quantity 
of  gold  was  shipped  out  of  the  country  in  the  course 
of  the  years,  British  loans  were  raised  in  the  open 
markets  of  the  United  States  and  elsewhere,  large 
direct  advances  were  received  from  the  American 
Government,  and  special  arrangements  were  made 
with  Argentina  and  other  countries  for  the  pur- 
pose of  financing  the  importation  into  the  United 
Kingdom  of  goods  from  them  for  a  term  of  years. 

However,  notwithstanding  the  foreign  loans  that 
Britain  was  thus  obliged  to  contract  and  in  spite 
of  various  other  altered  conditions,  the  financial 
strength  of  Great  Britain  still  remains  intact.  It 
is  true,  that,  owing  to  the  exigencies  of  the  war,  ap- 
proximately 15,000,000,000  worth  of  her  previously 
held  foreign  investments  have  been  sold.  And  it 
is  also  true  that  the  United  Kingdom,  since  1914, 
has  borrowed  abroad  about  |7,000,000,000;  of 
which  sum  somewhat  over  |4,000,000,000  took  the 
form  of  advances  by  the  United  States  Government. 
But,  on  the  other  hand,  Britain  has  loaned  during 
the  war  and  post-war  periods  to  her  Allies  and  Do- 
minions a  sum  equal  to  about  |9,000,000,000.  To 
be  sure,  certain  of  these  new  investments,  such  as 
the  loan  to  Russia,  may  be  looked  upon  as  of  ques- 


116       INTERNATIONAL  TRADE  BALANCE 

tionable  value.  If  the  new  debt  incurred  abroad  by 
the  United  Kingdom  be  placed  against  the  new  in- 
vestments, the  total  of  her  foreign  investments  is 
nearly  as  large  as  it  was  prior  to  the  war.  "A 
reasonable  estimate,"  we  are  assured  by  Sir  George 
Paish,  "is  that  Great  Britain  now  owns  foreign 
investments  to  the  nominal  value  of  over  £5,000 
millions,  against  which  she  owes  about  £1,500  mil- 
lions abroad,  and  that  after  allowing  for  the  re- 
payment of  her  foreign  debt  and  writing  off  her 
doubtful  investments  the  net  and  real  value  of  her 
foreign  investments  is  at  least  £3,000  millions."  ^ 
The  other  items  in  the  invisible  account  were 
also  naturally  affected  by  the  war.  Despite  the  loss 
in  tonnage  of  the  British  merchant  marine  as  a 
result  of  submarine  activity,  the  income  from  ship- 
ping probably  greatly  increased,  owing  to  the  sharp 
advance  in  freight  rates.  The  British  share  of  the 
bankers'  and  brokers'  commissions  in  the  financing 
of  international  trade  probably  did  not  fall  far,  if 
at  all,  below  the  pre-war  standard.  On  the  other 
hand,  earnings  from  insurance  probably  increased. 
The  movement  of  emigration  was  much  reduced 
during  the  war.  Taking  into  consideration,  there- 
fore, all  the  invisible  factors,  it  is  probable  that  the 
United  Kingdom  enjoyed  a  larger  excess  of  in- 
visible credits  at  the  time  of  the  Armistice  than  be- 
fore the  war.^ 

*  Paish,  "The  Economic  Outlook  in  Europe,"  The  Contemporary 
Review,  September,  1919. 

^  See  estimates  of  Cramniond,  The  Quarterly  Review,  July,  191S, 
and  Keynes,  "The  Economic  Consequences  of  the  Peace,"  p.  253. 


TRADE  BALANCE  OF  UNITED  KINGDOM  117 

While,  it  is  true,  the  depreciation  of  the  pound 
sterling  in  certain  countries  is  set  forward  as  evi- 
dence of  a  large  debit  balance  against  England,  it 
must  be  remembered  that  there  are  other  reasons  as 
well  for  this.  The  monetary  conditions  within  the 
country,  marked  by  a  depreciation  of  British  paper 
money,  must  be  held  to  be  responsible  in  no  small 
part  for  the  state  of  the  foreign  exchanges.  And, 
moreover,  the  depreciation  of  the  sovereign,  espe- 
cially in  the  United  States,  is  to  be  attributed  in 
part  to  the  fact  that  Great  Britain,  in  granting 
large  credits  to  countries  on  the  European  conti- 
nent, has  been  obliged  to  obtain  credits  from  Amer- 
ica and  elsewhere.  Great  Britain  has  been  lending 
her  credit  to  her  European  neighbors,  to  enable 
them  to  purchase  abroad  the  goods  of  which  they 
were  urgently  in  need.  Britain  is  the  one  Euro- 
pean belligerent  nation  which  has  succeeded, 
through  a  vigorous  taxation  policy  and  a  sound 
balancing  of  her  budget,  in  showing  a  sui^plus  of 
tax  revenues  over  expenditures.  The  British  ex- 
port trade  ^as  also  shown  unmistakable  signs  of 
recovery.  That  sterling  exchange  should,  there- 
fore, have  fallen  so  low  and  have  remained  so  far 
below  par  points  to  the  conclusion  suggested  above 
that  Great  Britain  has,  in  no  small  part,  been 
financing  the  trade  of  her  European  Allies. 

Concerning  this  phase  of  British  financial  policy, 
Professor  J.  H.  Williams  has  declared: 

"England  has  used  her  improved  position  in  for- 
eign trade  to  assume  a  considerable  share  of  the 


118       INTERNATIONAL  TRADE  BALANCE 

unfunded  indebtedness  of  the  continent  of  Europe 
to  us  [United  States],  rather  than  to  pay  off  her 
own  indebtedness  here.  This  is  indicated  by  the 
fact  that  New  York  banks  and  dealers  have  sold 
to  London  in  large  part  their  holdings  of  francs, 
marks,  and  other  currencies;  and  for  this  reason 
sterling  has  probably  ruled  somewhat  lower  than 
its  own  merits  would  warrant  and  the  other  Euro- 
pean exchanges  somewhat  higher."  ^ 

It  is  of  interest  to  note  further  that  in  the 
opinion  of  this  recognized  American  student  of  in- 
ternational trade  these  sterling  operations  indi- 
cate "that  in  spite  of  the  war  Great  Britain  has 
been  recovering  her  traditional  position  as  the 
world's  money  market;  and  this  recovery  is  strong 
evidence  that  triangular  offsets  are  to-day  operat- 
ing upon  our  own  international  balance."  The 
action  of  Loudon  in  assuming,  in  part,  the  burden 
of  other  countries,  the  action  of  New  York  bankers 
in  converting  much  of  their  holdings  of  other  ex- 
changes into  sterling  credits,  together  with  the  fact 
that  the  United  States,  meanwhile,  had  a  favorable 
balance  of  trade  with  Europe  and  an  adverse  bal- 
ance with  non-European  countries,  must  not  be 
looked  upon  as  a  new  element  in  American  interna- 
tional relations.  On  the  contrary,  these  operations 
represent  the  revival  of  pre-war  conditions  and 
pre-war  practice. 

*  Williams,    The  Review   of   Economic   Statistics,    Supplement, 
June,  1921,  p.  208. 


CHAPTER  IV 

THE  CANADIAN  BALANCE  OF  TRADE 

It  was  stated  in  an  earlier  chapter  that  Canada, 
a  so-called  immature  borrowing  country  before 
1914,  is  passing  through  a  transitional  stage  from 
which  she  is  about  to  emerge  a  mature  debtor  na- 
tion. And  with  this  transition  there  would  appear, 
it  was  suggested,  an  accompanying  readjustment 
in  her  balance  of  trade.  Her  normal  pre-war  ex- 
cess of  merchandise  imports  would  come  to  be 
superseded  by  a  normal  excess  of  merchandise  ex- 
ports. This  change  in  the  Canadian  trade  balance 
would  be  similar  to  that  which  occurred  in  1874  in 
the  balance  of  trade  of  the  United  States.  And  the 
factors  which  led  to  the  American  trade  readjust- 
ment at  that  time  would  in  a  general  way  apply 
also  to  the  Canadian  situation. 

Just  as  the  American  excess  of  merchandise  im- 
ports down  to  1874  may  be  attributed  in  large  part 
to  the  great  volume  of  capital  borrowed  by  the 
United  States  from  abroad,  so  likewise  the  Cana- 
dian excess  of  imports  prior  to  1914  may  be  ex- 
plained by  the  inflow  of  foreign  capital  into  the 
Dominion.  Similarly,  the  chief  factor  which  gave 
rise  after  1874  to  an  export  balance  in  the  United 
States  is  about  to  manifest  itself  in  like  manner  in 

119 


120       INTERNATIONAL  TRADE  BALANCE 

Canada.  This  factor  appears  in  the  tendency  of 
interest  payments  to  overtake  and  surpass  in  the 
course  of  time  the  volume  of  new  capital  annually 
invested.  The  change  in  the  trade  balance  of  the 
Dominion  will  ultimately  occur  as  a  result  in- 
directly of  the  very  accumulation  of  foreign  capital 
investments  within  the  country.  The  increasing 
interest  payments  by  Canada  on  such  investments 
will  eventually  surpass  in  volume,  and  that  prob- 
ably in  the  not  remote  future,  the  new  foreign 
capital  invested  annually. 

That  Canada  has  been  an  increasingly  attractive 
field  for  foreign  investors  is  well  known.  At  the 
end  of  the  year  1910,  it  was  stated  by  Sir  George 
Paish  that  British  capital  had  been  invested  in 
Canada  to  the  extent  of  approximately  |1,800,- 
000,000.1  jj^  March,  1915,  the  opinion  was  unoffi- 
cially expressed  by  Sir  Edmund  Walker,  President 
of  the  Canadian  Bank  of  Commerce,  that  British 
investments  in  Canada  probably  amounted  to  not 
less  than  |2,750,000,000.  It  must  be  added,  how- 
ever, that  Sir  Edmund  Walker  included  in  this 
total  the  indebtedness  of  Canada  to  the  continent  of 
Europe,  inasmuch  as  continental  investing  in  the 
Dominion  has  been  carried  out  chiefly  through 
London.  Such  investments  of  the  countries  of  the 
continent,  however,  amounted  in  1913  to  not  over 
1175,000,000.-     After  making  the  proper  adjust- 

^  Paish,    "Great    Britain's    Capital    Investments,"    Journal    of 
Royal  Statistical  Society,  January,  1911. 

^"Dominion's  Royal  Commission  Reports"   (Cd.  8458),  p.  417. 


THE  CANADIAN  BALANCE  OF  TRADE    121 

ment  on  account  of  this  item,  it  will  be  noted  that 
during  the  years,  1910-13,  British  investments  in 
Canada  increased  about  |775,000,000,  or  nearly 
forty-five  per  cent.  An  even  greater  rate  of  in- 
crease is  to  be  noted  in  the  flow  of  American  capital 
into  Canadian  channels.  Whereas  the  approximate 
volume  of  United  States  investments  in  Canada 
amounted  in  1909  to  |257,000,000,  the  estimate 
for  1913  was  1637,000,000.^  This  represents  an  in- 
crease of  about  127  per  cent  during  the  four  years. 

It  is  probable  that  during  the  three  years  im- 
mediately preceding  the  outbreak  of  the  World 
War  Canadian  borrowings  of  foreign  capital  aver- 
aged well  over  |300,000,000  per  annum.  And  in 
1913,  in  the  course  of  an  address  in  Toronto,  Sir 
George  Paish  predicted  that  within  fifteen  years 
new  or  further  British  investments  amounting  to 
12,500,000,000  would  be  made  in  Canada.  The  war 
obviously  will  have  the  effect  of  obstructing  the 
fulfillment  of  this  prediction. 

Canada  may  be  likened  to  a  young  man,  ener- 
getic, ambitious,  and  in  possession  of  an  extremely 
valuable  but  unimproved  estate,  for  the  improve- 
ment of  which  much  capital  is  needed.  To  com- 
plete the  analogy  we  must  picture  a  parent  willing 
to  lend  the  capital  necessary  for  the  development 
of  the  estate.  During  the  period  of  construction, 
the  young  man  has  been  taking  care  of  the  in- 
terest charges  on  his  indebtedness  readily  enough 
through  the  contraction  of  new  loans.     Obviously 

^  Field,  "Capital  Investments  in  Canada,"  p.  25. 


122   INTERNATIONAL  TRADE  BALANCE 

our  young  man  cannot  permanently  overlook  the 
fundamental  consideration,  that  his  construction 
expenditures  must  be  justified  in  the  end  by  an  in- 
creased production  of  wealth  at  least  proportional 
to  the  investments :  that  is,  he  must  provide  even- 
tually for  debt  charges  from  current  income,  and 
not  as  heretofore  from  capital  account. 

Even  before  the  World  War  brought  home  to 
Canada  the  necessity  of  an  economic  readjustment, 
a  halt  had  been  called  in  the  almost  headlong  con- 
struction of  railways  and  other  capitalistic  plants. 
Indeed,  this  began  several  years  before  August, 
1914.  A  well-timed  hint  from  certain  prominent 
English  investment  houses  in  the  summer  of  1909 
was  taken  to  heart  by  Canadians.  These  British 
banking  firms,  interested  in  Canadian  enterprises, 
agreed  not  to  undertake  any  new  Dominion  flota- 
tions for  several  months.  During  that  time  the 
flow  of  British  capital  to  Canada,  through  its  prin- 
cipal channel,  practically  ceased.  "The  cause  of 
the  flnanciers'  decision,"  declared  Mr,  F.  W.  Field, 
"was  undoubtedly  the  unusually  heavy  borrowing 
by  Canada,  its  tendency  to  exceed  due  bounds,  and 
the  attempt  to  market  a  few  worthless  securities 
among  a  large  number  of  good  ones."  ^  Enjoying 
for  so  long  a  time  an  almost  unlimited  credit  in 
Great  Britain,  it  was  quite  natural  for  Canada  to 
invest  heavily,  oftentimes  blindly,  in  development 
works.  So  rapidly  did  this  take  place  that  Canada, 
notwithstanding  a  population  of  less  than  9,000,- 

*  Field,  "Capital  Investments  in  Canada,"  p.  168. 


THE  CANADIAN  BALANCE  OF  TRADE    123 

000,  had  in  1914  three  transcontinejital  lines.  She 
enjoyed  the  distinction  of  having  more  railroad 
mileage  per  capita  than  any  other  country  in  the 
world.  The  reciprocal  fact  is  obvious  that  this  is 
a  questionable  distinction,  since  Canada,  therefore, 
must  have  fewer  people  per  railway  mile  than  any 
other  country.  Railroad  construction  clearly  had 
been  carried  to  a  point  far  in  advance  of  immedi- 
ate requirements.  Indeed,  it  is  maintained  that 
general  railroad  construction  in  Canada  was  five 
to  ten  years  ahead  of  the  demand.  The  total  mile- 
age increased  from  17,657  in  1900  to  29,304  in 
1913,  or  nearly  65  per  cent.  During  the  same 
period,  the  capital  liability  of  railways  increased 
from  1784,042,799  to  |1,531,830,692,  or  substan- 
tially 100  per  cent.  Meanwhile,  however,  the  popu- 
lation of  the  country  increased  only  about  43  per 
cent.  The  development  of  railroads  was  accompa- 
nied by  an  expansion  in  the  industrial  field  and  an 
extension  of  building  throughout  the  countiy. 

Feeling  that  construction  enterprises  had  out- 
stripped the  population  demands,  many  realized 
that  it  was  time  to  demonstrate  by  increased  pro- 
duction the  wisdom  of  previous  years  of  building. 
The  tightening  of  the  European  money  markets, 
owing  to  the  Balkan  crisis,  and  the  difficulty  of 
obtaining  the  usual  supply  of  capital  from  Great 
Britain  on  normal  terms,  doubtless  brought  about 
the  readjustment  earlier  than  would  otherwise 
have  been  the  case.  Among  the  various  evidences 
of  reduced  activity  during  the  year  1913  may  be 


124       INTERNATIONAL  TRADE  BALANCE 


noted  a  distinct  contraction,  particularly  in  the 
west,  in  the  volume  of  building  permits,  a  decline  in 
bank  clearings,  and  an  increase  in  the  number  of 
commercial  failures. 

While  engaged  in  the  enforced  but  thoroughly 
wholesome  process  of  economic  readjustment, 
Canada  suddenly  found  her  task  greatly  compli- 
cated by  the  outbreak  of  the  war.  Owing  to  the  un- 
precedented demand  on  the  world's  capital,  due  to 
the  war,  Canada's  financial  embarrassment  in- 
creased. The  war  hastened  the  economic  transi- 
tion, and  it  undoubtedly  had  the  effect  of  differen- 
tiating between  the  essentially  sound  investment 
enterprises  and  those  based  on  uneconomic  founda- 
tions. 

In  computing  Canada's  balance  of  international 
debits  and  credits  the  items  to  receive  first  atten- 
tion will  be  the  visible  exports  and  imports.  In 
the  following  statement  these  are  tabulated  for  a 
series  of  fiscal  years, ^ 

(Figures   denote   millions) 


1911 

1912 

1913 

$686.6 
5.4 

1914 

Imports : 
Merchandise    

$462.0 
10.2 

$533.3 

26.0 

$559.3 

$307.7 
7.6 

$635.5 

Bullion    

15.2 

Total    

$472.2 

$290.0 

7.2 

$692.0 

$377.1 
16.1 

$650.7 

Exports: 
Merchandise    

$455.4 

Bullion    

23.6 

Total    

$297.2 
$175.0 

$315.3 

$244.0 

$393.2 

$298.8 

$479.0 

Net     Excess     of    Imports 
(merchandise  and  bul- 
lion)       

$171.7 

^  Report  of  Department  of  Trade  and  Commerce,   1912,  pt.   1, 
pp.  28-37.     "Canada  Year  Book,  1913,"  pp.  228,  232,  233. 


THE  CANADIAN  BALANCE  OF  TRADE    125 

For  the  three  years  ending  March,  1913,  the  aver- 
age annual  excess  of  imports  was  $239,000,000. 
Let  us  note  the  invisible  items  of  Canada's  balance 
sheet,  in  order  to  discover  the  nature  of  the  invis- 
ible account.  Naturally  we  shall  expect  to  find  an 
excess  of  credits  approximating  in  value  the  excess 
of  merchandise  imports. 

Among  the  ^'invisible"  items,  the  most  important 
are  the  flow  into  the  country  of  borrowed  foreign 
capital  and  the  outflow  of  interest  and  dividend 
charges  to  the  owners  of  such  capital.  It  will  be 
recalled  that,  in  the  opinion  of  Sir  Edmund  Walker, 
the  total  of  British  and  other  European  invest- 
ments in  Canada  was  approximately  |2,750,000,000. 
From  the  investigations  of  the  Editor  of  the  Mone- 
tary Times,  it  appears  that  the  estimated  total  in- 
vestments of  the  United  States  in  Canada,  in  1913, 
amounted  to  |636,903,952.i  If  we  accept  the  figure 
13,400,000,000  as  representing,  within  a  slight  mar- 
gin of  error,  the  total  of  Canadian  indebtedness 
abroad,  it  will  be  possible  to  estimate  with  reason- 
able approximation  the  annual  interest  charges. 
Accepting  4I/2  per  cent  as  the  average  interest 
rate,^  Canada's  interest  payments  abroad  during 
1913  amounted  to  about  |148,000,000.  This 
amount,  however,  must  be  somewhat  diminished  by 
reason  of  the  fact  that  we  are  seeking  the  average 
for  the  period.    Obviously,  the  annual  interest  pay- 

^  Field,  "Capital  Investments  in  Canada,"  p.  25. 
^This  rate  was  advanced  by  Sir  Edmund  Walker,  in  a  private 
communication,  as  a  fair  basis  for  calculation. 


126       INTERNATIONAL  TRADE  BALANCE 

ments  during  the  earlier  years  were  less  than  the 
figure  noted,  owing  to  the  subsequent  swelling  of 
the  total  investments  within  the  country.  Making 
adequate  adjustment  to  meet  this  fact,  there 
emerges  as  the  average  annual  interest  charge 
during  the  years  1911-13,  approximately  $125,000,- 
000.  It  has  already  been  mentioned  that,  dur- 
ing the  years  immediately  before  the  outbreak  of 
the  war,  Canadian  borrowings  of  foreign  capital 
probably  averaged  well  over  |300,000,000  per 
year.  Therefore,  during  that  period  it  would  seem 
that  Canada  was  receiving  annually  a  net  credit, 
from  the  two  items  under  consideration,  of  about 
1175,000,000. 

Another  invisible  item  in  Canada's  balance  sheet 
is  the  capital  carried  into  the  country  by  American 
farmers  moving  into  the  Canadian  West.  In  his 
Budget  Speech  of  May  12,  1913,  Sir  Thomas  White, 
the  minister  of  finance,  estimated  that  this  class  of 
immigrants  took  with  them  into  Canada  capital  to 
the  extent  of  flOOO  per  capita.  The  average  annual 
number  of  immigrant  arrivals  from  the  United 
States  during  the  three  years  1911-13,  was 
131,000.  If  the  estimate  of  the  finance  minister 
be  accepted,  account  must  be  taken  of  this  invisible 
credit  of  |131,000,000  per  annum  during  the  se- 
lected period.  From  this  amount,  however,  a  de- 
duction must  be  made  for  the.  "effects  and  cash"  of 
emigrants  from  Canada,  most  of  whom  enter  the 
United  States.  During  the  three  years  1911-13, 
the  average  annual  number  of  immigrant  arrivals 


THE  CANADIAN  BALANCE  OF  TRADE     127 

in  the  United  States  from  Canada  was  62,790. 
There  is  also  a  considerable  return  movement  back 
into  the  United  States  on  the  part  of  American 
citizens  who  have  emigrated  to  Canada.  During 
the  two  years  ending  June  30,  1911,  this  back-flow 
of  Americans  from  Canada  was  equal,  numerically, 
to  one-third  of  the  outward  movement.^  If  this 
ratio  be  adopted  as  approximately  applicable 
during  the  period  under  consideration,  the  number 
of  American  emigrants  returning  from  Canada 
averaged  about  43,000  per  year.  The  total  arrivals, 
therefore,  in  the  United  States  from  Canada  during 
these  years  averaged  105,000.  The  fact  should  be 
borne  in  mind  that  the  typical  Canadian  emigrant 
seeking  a  home  in  the  United  States,  is  a  man  pos- 
sessing little  beyond  ambition,  and  that  the  Ameri- 
can returning  from  a  brief  sojourn  in  Canada  is 
normally  one  who  has  been  disappointed  in  his 
search  for  better  conditions.  Accordingly,  the  esti- 
mate that  these  two  classes  of  arrivals  in  the  United 
States  bring  with  them  capital  not  exceeding  |500 
per  head  will  probably  be  deemed  liberal.  Proceed- 
ing on  this  assumption,  the  total  capital  carried  an- 
nually from  Canada  into  the  United  States  by 
Canadian  emigrants  and  American  settlers  return- 
ing from  the  Dominion  may  be  estimated  to  average 
at  the  time  about  |50,000,000.  On  account,  there- 
fore, of  the  immigration  and  emigration  movements 
between  the  two  countries,  there  was  a  resultant 

*  Husband,    American    Economic    Review,    Supplement,    March, 
1912,  p.  84. 


128       INTERNATIONAL  TRADE  BALANCE 

net  invisible  credit  of  about  |80,000,000  per  year 
into  Canada.  It  must  be  admitted  that  this  is,  in  a 
degree,  a  conjectural  estimate. 

An  invisible  item  which,  because  of  insufficient 
data,  must  be  approached  with  caution  is  that  of 
private  remittances  both  into  and  out  of  Canada. 
During  the  three  fiscal  years  1911-13,  the  value  of 
money  orders  issued  in  Canada  and  payable  in 
other  countries  averaged  annually  somewhat  over 
132,000,000 ;  whereas  the  value  of  money  orders  is- 
sued in  other  countries  and  payable  in  Canada,  dur- 
ing the  same  period,  averaged  each  year  |8,700,- 
000.^  From  these  items  accordingly  we  find  an 
average  net  outflow  from  Canada  of  |24,000,000. 
There  is  no  available  information,  however,  which 
shows  what  proportion  of  these  orders  is  repre- 
sented by  business  and  private  remittances  nor  is  it 
at  all  certain  that  all  private  remittances  flowed 
through  this  channel. 

There  are  other  invisible  items  sufficiently  im- 
portant to  merit  notice.  Canada  is  obliged  each 
year  to  meet  considerable  charges  on  account  of 
the  carriage  in  foreign  ships  of  much  of  her  over- 
seas trade.  On  the  other  hand,  the  annual  earn- 
ings of  the  Canadian  merchant  marine  represent  a 
credit  of  some  importance.  Again,  Canada  each 
year  serves  as  a  vacation  land  for  thousands  of 
tourists,  whose  various  expenditures  may  be  re- 
garded as  a  not  unimportant  credit.  Naturally, 
there  is  also  a  corresponding  debit  in  the  expendi- 

*  "Canada  Year  Book,  1913,"  p.  403. 


THE  CANADIAN  BALANCE  OF  TRADE    129 

tures  by  Canadians  in  the  United  States  and 
Europe. 

Unfortunately,  however,  there  are  no  published 
statistics  nor  even  official  estimates  pertaining  to 
these  items.  Accordingly  the  attempt  to  handle 
them  must  be  based,  in  considerable  degree  on  rea- 
sonably sane  guesswork. 

For  the  purpose  of  this  inquiry  the  following 
compromise  plan  will  perhaps  be  deemed  reason- 
able. It  is  probably  true  in  respect  to  the  shipping 
items  that  the  annual  charges  which  Canada  was 
called  upon  to  meet,  for  services  rendered  by  for- 
eign shipping  interests,  were  in  excess  of  that  por- 
tion of  the  annual  earnings  of  Canadian  ships  de- 
rived from  the  carriage  of  goods  of  foreign  coun- 
tries. At  the  same  time,  it  was  doubtless  true  that 
the  expenditures  of  tourists  and  other  visitors  an- 
nually in  Canada  surpassed  in  volume  the  outflow 
of  funds  on  account  of  the  expenditures  of  Cana- 
dians in  other  countries.  Accordingly  we  may  off- 
set the  former  balance  against  Canada,  on  account 
of  shipping  charges,  by  the  latter  balance  in  favor 
of  Canada.  This  adjustment  probably  involves  a 
not  unduly  large  margin  of  error.  The  results  may 
be  presented  in  tabular  form  as  shown  on  page  130. 

As  was  the  case  in  the  foregoing  chapters,  when 
considering  the  balance  sheet  of  the  United  States 
and  the  United  Kingdom,  so  here  again  we  note 
that  an  exact  balance  has  not  been  reached.  In 
this  instance  the  discrepancy  may  in  part  be  at- 
tributed to  the  margin  of  error  admittedly  present 


130   INTERNATIONAL  TRADE  BALANCE 

Balance  Sheet  of  Canada 
Figures  Kepresent  Annual  Averages  for  the  Period  1911  to  1913 

( Figures   denote  millions ) 

Visible  Credits  and  Debits 

Exports  and  imports  of  merchandise,  including  bullion: 
Average  annual  excess  of  imports    239 

Average  annual  excess  of  Visible  Debits   $239 

Invisible  Credits  and  Debits 

New    capital    imported    and    interest    payments    payable 

abroad :   average  net  credit   175 

Capital   carried   into   Canada   by   immigrants   and   out   by 

emigrants :   average  net  credit   80 

Payments  effected  through  the  issuance  of  money  orders: 

average  net   debit    24 

Payments  on   account  of   ocean  freights   and   earnings   of 

Canadian    ships;    expenditures    in    Canada    by    tourists, 

etc.,   and    abroad   by   Canadians;    estimated   to   balance 

Average  annual  excess  of  Invisible  Credits   $231 

in  the  calculation  in  respect  to  the  shipping  and 
tourist  items. 

Canada  owes  much  to  the  British  investor,  if  only 
because  he  has  almost  entirely  financed  its  exten- 
sive railway  system.  In  contrast  to  the  experience 
of  India,  however,  Canada,  despite  its  heavy  bor- 
rowings in  London  on  account  of  railways,  does 
not  impori  its  railway  materials  to  any  large  ex- 
tent from  the  United  Kingdom.  Canada,  having 
developed  an  important  metallurgical  industry,  is 
able  to  supply  in  large  measure  the  rails,  locomo- 
tives, and  other  equipment  required  for  domestic 
use.  The  following  figures  indicate  the  relative  un- 
importance of  the  Canadian  market  to  the  British 
producer  of  railroad  materials.^ 

^  Hobson,  "Export  of  Capital,"  p.  14. 


THE  CANADIAN  BALANCE  OF  TRADE    131 


Fear 

Canadian   Railway 
Issues  in  London 

Imports  of  Iron 

and  iSteel  Railway 
Bars    and    Rails 

into  Canada:  From 
United  Kingdom 

Total 

1907 

1908 

1909   

1910 

1911 

£2,020,100 

12,395,500 

8,060,500 

5,525,800 

19,608,200 

£46,311 
17,459 
64,328 
58,944 
15,024 

£373,573 
255,617 
159,496 
279,675 
179,197 

The  trade  statistics  of  Canada  show  that  British 
shipments  of  other  kinds  of  railroad  materials  and 
of  general  merchandise  have  in  the  main  been 
equally  unimportant  compared  with  the  amount  ob- 
tained elsewhere.  It  is  apparent  upon  examina- 
tion of  the  merchandise  import  figures  of  Canada 
that  England  does  not  export  goods  to  the  Do- 
minion equal  in  value  to  the  capital  supplied.  The 
following  table  shows  the  total  imports,  exclusive 
of  coin  and  bullion  into  Canada  from  the  United 
Kingdom  and  the  United  States  during  a  series 
of  years. 

(Figures  denote  millions) 


Fiscal  Year 

Imports  into  Canada  from: 

United  Kingdom 

United  States 

1910    

$95.7 
110.6 
117.2 

$233.0 
284  3 

1911    

1912    

342  2 

To  facilitate  a  comparison  of  Canada's  separate 
trade  balances  with  the  United  Kingdom  and  the 
United  States,  statistics  are  presented  in  the  fol- 
lowing statement  showing  exports  from  the  Do- 


132       INTERNATIONAL  TRADE  BALANCE 

minion  to  the  two  countries,  during  the  years  1910 
to  1912,  again  exclusive  of  coin  and  bullion. 

(Figures  denote  millions) 


Fiscal  Year 

Exports  from  Canada  into: 

United  Kingdom 

United  States 

1910    

$149.6 
137.0 
151.8 

$110.6 

1911    

112.2 

1912    

113.0 

It  will  be  noted  from  the  above  tables  that 
Canada,  during  the  period  under  consideration,  ex- 
ported goods  to  Great  Britain  in  excess  of  goods  im- 
ported from  that  country  to  the  extent  of  about 
110,000,000  per  year.  At  the  same  time  the  ex- 
cess of  Canadian  imports  from  the  United  States 
over  exports  to  that  country  showed  an  annual 
average  value  of  about  |175,000,000.  These  facts 
lend  support  to  the  common  assertion  that  Eng- 
lish loans  to  Canada  help  that  country  to  finance 
V  its  American  trade.  English  capital,  therefore, 
i  "passes  to  Canadians  in  the  form  of  American 
/  goods." 

Aside  from  the  influence  of  geographic  proximity, 
there  is  an  important  reason  for  the  disparity  in  the 
importation  into  Canada  of  American  and  British 
goods.  In  the  past,  the  great  bulk  of  British  in- 
vestments have  gone  into  government  securities 
and  railway  and  industrial  bonds,  comparatively 
little  into  industrial  stocks,  which  carry  the  tech- 
nical management.    American  capital,  on  the  other 


THE  CANADIAN  BALANCE  OF  TRADE    133 

hand,  has  entered  Canada  chiefly  as  branch  fac- 
tories and  other  outright  industrial  investments. 
This  question  is  discussed  in  the  report  of  a  former 
British  Trade  Commissioner  in  Canada.  "The  pur- 
chase of  government  securities  and  municipal 
bonds,"  he  declared,  "and  even  of  the  bonds  and 
shares  of  the  great  Canadian  railroads — the  forms 
which  British  investment  has  hitherto  principally 
taken — operates  less  directly  and  immediately  to 
stimulate  trade  than  the  investment  of  capital  in 
varying  amounts  over  a  wide  range  of  industrial 
concerns,  together  with  the  establishment  of  branch 
factories  and  agencies  of  all  sorts,  which  has  been 
characteristic  of  the  form  of  American  interest  in 
the  development  of  Canada."  ^ 

On  account  of  the  great  increase  in  the  rate  of 
flow  of  British  and  American  capital  into  Canada 
during  the  past  decade,  Canadian  imports  have 
grown  at  a  faster  rate  than  exports,  as  the  follow- 
ino-  statement  will  show. 


( Figures 

denote  millions 

■ 

Years 

Total  Exports 

Total  Imports 

Ratio  of  Exports  to 
Imports 

1901    

1902    

1903    

1904    

1911    

1912    

1913    

1914    

$196.5 
211.6 
225.8 
213.5 

297.2 
315.3 
393.2 
479.0 

$190.4 
212.3 
241.2 
259.2 

472.2 
559.3 
692.0 
650.7 

103.19  per  cent 
99.70     "       " 
93.63     "       " 

82.37  "       " 

62.93     "       « 

56.38  "       " 
56.83     "       " 
73.60     "       " 

*  Quoted  in  Field,  "Capital  Investments  in  Canada,"  p.  192. 


134       INTERNATIONAL  TRADE  BALANCE 

This  situation,  however,  cannot  persist  indefi- 
nitely. In  the  not  distant  future,  as  mentioned 
elsewhere,  the  present  disparity  in  value  between 
exports  and  imports  must  shrink,  then  disappear, 
and  later  be  followed  by  an  excess  of  exports.  For 
an  indefinitely  long  period  thereafter  the  Canadian 
trade  balance  will  continue  to  be  marked  by  exces- 
sive exports. 

Owing  to  conditions  growing  out  of  the  war,  the 
trade  balance  of  the  Dominion,  for  several  years, 
was  marked  by  an  excess  of  exports.  While  the 
time  perhaps  has  not  yet  fully  arrived  when 
Canada,  as  a  mature  borrower,  will  continue  nor- 
mally to  export  goods  to  a  larger  value  than  her 
imports,  yet  this  readjustment  is  not  far  distant. 
If  the  practice  adopted  by  necessity  during  the  war 
of  raising  capital  at  home  be  continued  and  ex- 
panded and  the  inflow  of  foreign  capital  fail  to 
reach  the  pre-war  level  this  transition  would  prob- 
ably be  hastened. 

Variations  in  the  external  trade  of  Canada  since 
1914  have  been  notable  and  they  illustrate  the  ex- 
tent to  which  the  trade  and  industry  of  the  Domin- 
ion have  been  affected  by  war  conditions.  The  ag- 
gregate trade,  made  up  of  imports  for  home  con- 
sumption and  total  exports,  had  an  average  yearly 
value  of  1872,000,000  during  the  three  fiscal  years 
1911-13.  Yet  during  the  period  1917-19,  it  reached 
the  annual  average  of  |2,249,000,000.  This  in- 
crease, striking  as  it  is,  is  not  more  significant 
than  the  change  which  appeared  in  the  relative  im- 


THE  CANADIAN  BALANCE  OF  TRADE    135 

portance  of  exports  and  imports.  During  the  three 
years  ended  in  1913,  there  was  an  import  balance 
which,  as  has  been  pointed  out  above,  averaged 


Trade  Balance  of  Canada 


$500,000,000 
$400,000,000 

1 

1- 

1  1 

O 
a. 

X 

m 

fe    $300,000,000 

1 

$^ 

$200,000,000 

$100,000,000 

0 
$100,000,000 

y 

v.. 

\ 

-T 

^\ 

p-' 

V  ^ 

\ 

A 

\ 

o 

\ 

a. 

\ 

s 

\ 

u.    $200,000,000 
o 

\ 

\ 

$300,000,000 
$400,000,000 

o         n          to         ro 

3             CO             o 

o         CO           c3          r 

=             03             C 

3             0 

3         a 

9             0 

o         a 

I         c 

»         c 

13 

O 

i 

as 

136       INTERNATIONAL  TRADE  BALANCE 

$239,000,000  a  year.  An  export  balance,  however, 
appeared  in  the  fiscal  year  1915-16.  The  excess  of 
exports  grew  to  such  proportions  that  the  annual 
average  for  the  years  1917-19  amounted  to  |409,- 
000,000.  The  foregoing  chart  reveals  the  gen- 
eral character  of  Canada's  trade  balance  from  the 
time  of  Confederation  to  1921.  The  chart  does  not 
indicate  the  aggregate  volume  of  imports  and  ex- 
ports, but  merely  the  difference  between  them. 

The  excess  of  exports,  which  increased  so  rapidly 
after  its  appearance  in  1915,  persisted  till  the  close 
of  the  fiscal  year  1919-20.  During  the  succeeding 
twelve  months,  ending  in  March,  1921,  it  was  super- 
seded by  a  small  excess  of  imports,  amounting  to 
130,000,000. 

It  will  be  observed,  from  the  foregoing  diagram, 
that  the  import  balance  was  most  pronounced  dur- 
ing the  decade  which  closed  in  1913.  This  was  a 
period  of  heavy  foreign  borrowings  on  the  part  of 
Canadian  governments,  municipalities,  and  indus- 
try. The  excess  of  imports  in  large  part  formed 
the  offsetting  factor  to  counterbalance  this  invis- 
ible credit  in  the  form  of  foreign  capital  importa- 
tion. With  the  partial  depression  of  1913-14,  in- 
duced in  part  by  the  tightening  of  the  European 
money  markets,  the  economic  energies  of  the  Do- 
minion were  forced,  as  indicated  elsewhere  in  this 
chapter,  into  the  task  of  increasing  production  with 
the  industrial  plant  already  in  hand,  and  for  the 
time  attention  was  diverted  from  the  creation  of 
new  enterprises. 


THE  CANADIAN  BALANCE  OF  TRADE     137 

Keduced  import  balances  characterized  tlie  years 
1914  and  1915,  It  is  true  the  outbreak  of  the  war 
contributed  toward  this  result.  In  its  later  stages 
the  war  had  the  effect  of  stimulating  production, 
practically  eliminating  unemployment,  and  creat- 
ing a  large  overseas  market  for  many  Dominion 
products. 

Yet  the  fact  remains  that  quite  apart  from  the 
war  there  was  an  important  reason  why  readjust- 
ment was  ultimately  inevitable  in  the  Dominion  bal- 
ance of  trade.  In  discussing  this  phase  of  Canadian 
trade.  The  Monetary  Times  has  declared  that 
whereas  the  heavy  foreign  borrowings  by  Canada 
made  possible  the  continuous  import  balance  down 
to  1913,  the  checking  of  such  external  loans  in 
1914  with  their  practical  cessation  in  1917  re- 
sulted in  "corresponding  effects  on  our  trade."  ^ 
Continuing,  it  added  that  "we  now  do  most  of  our 
own  financing,  whereas  we  formerly  did  only  a 
part.  And  the  result  has  been  that  trade  has  been 
restored  to  more  nearly  normal;  for  it  must  be 
remembered  that  normal  trade  in  the  case  of 
Canada  will  be  represented  by  a  very  considerable 
balance  in  our  favor,  as  we  must  export  more 
goods  than  we  import  in  order  to  pay  the  interest 
on  our  external  obligations,  and  to  gradually 
repay  them  as  they  fall  due."  The  above  con- 
tention that  normal  trade  in  the  case  of  Canada 
must  be  marked  by  an  excess  of  exports  serves  to 
support  the  opinion  already  expressed  that  the  Do- 

^The  Monetcury  Times,  January  3,  1919,  p.  68. 


138       INTERNATIONAL  TRADE  BALANCE 

minion  is  about  to  become  a  mature  borrowing 
country — a  country  wliose  annual  interest  obliga- 
tions are  soon  to  exceed  in  volume  the  new  foreign 
capital  that  yearly  may  be  imported. 

Recalling  the  statement  that  English  loans  to 
Canada  helped  that  country  formerly  to  finance  its 
trade  with  the  United  States,  and  bearing  in  mind 
the  fact  that  during  the  war  Canada  was  able  less 
and  less  to  borrow  in  the  British  market,  we  find 
ourselves  facing  the  question  as  to  the  means  re- 
cently employed  by  Canada  for  the  purchase  of 
imports  from  her  American  neighbor.  That  the 
pre-war  balance  of  trade  between  Canada  and  the 
United  States  was  not  altered  materially  by  the 
war  may  be  noted  from  the  following  table  in 
which  figures  are  grouped  by  four-year  periods.^ 


Year    ended 
March  31 


Balance    of    Merchandise 

Trade    favorable    to    the 

United  8tates 


Balance  of  Trade  favor- 
able to  the  United  States; 
after    making    allowance 
for  shipments   of  gold 


1907-1910 
1911-1914 
1915-1918 


$398,000,000 

927,000,000 

1,050,000,000 


$394,000,000 
926,000,000 
904,000,000 


But  for  the  war,  with  its  curtailment  of  Canadian 
borrowings  in  London,  this  balance  would  doubt- 
less have  been  financed  in  the  usual  way.  Subse- 
quent to  1914  a  change  appeared  in  the  source  from 
which  the  Dominion  obtained  foreign  capital.  This 
fact  and  also  the  identity  of  the  new  source  are 
revealed  in  the  statement  whicli  follows. 

^Rife,  The  Moneta/rjf  Times,  January  3,  1919,  p.  158. 


THE  CANADIAN  BALANCE  OF  TRADE    139 


Canabiak  Borrowings  from  Great  Britain  and  the  United 

States:    1912-1917' 


Per  cent  of 

Per  cent  of 

Canada's   total 

Canada's  horrow- 

Canada's  borrow- 

Year 

borrotoing 

ing  in  Great 

ing  in  the  United 

Britain 

States 

1912    

$272,900,000 

74.8 

11.3 

1913    

373,800,000 

74.2 

13.5 

1914    

272,900,000 

68.1 

19.77 

1915    

341,900,000 

14.1 

72.11 

1916    

316,900,000 

1.5 

64.89 

1917    

772,700,000 

.63 

24.06 

^  Rife,  The  Monetary  Times,  January  3,  1919,  p.  158. 

American  investments  in  Canada,  which 
amounted  to  more  than  $600,000,000  prior  to  the 
war,  were  more  than  doubled  during  the  four  years 
following  1914.  Yet  notwithstanding  the  large 
volume  of  United  States  capital  imported  into 
Canada  during  the  war  period,  we  can  readily  see 
that  it  was  scarcely  of  itself  sufficient  to  offset  the 
vast  trade  debit  balance  against  Canada  on  ac- 
count of  imports  from  the  United  States.  We 
should  perhaps  expect,  therefore,  in  our  search  for 
additional  Canadian  credits,  that  the  Canadian 
excess  of  exports  to  Britain  over  imports  from 
that  country,  which  normally  marked  pre-war 
trade,  would  latterly  have  grown  to  much  larger 
proportions.  This,  indeed,  has  been  the  case,  as 
the  appended  figures  show. 


Yewrs  ended  March  SI 


Anglo-Canadian    frade^ 
Merchandise  balance  in  favor  of  Canada 


1907-1910 
1911-1914 
1915-1918 


$166,000,000 

167,000,000 

1,870,000,000 


Rife,  The  Monetary  Times,  January  3,  1919,  p.  158. 


140       INTERNATIONAL  TRADE  BALANCE 

Through  her  enormously  increased  purchases  of 
Canadian  goods  during  the  war  period,  Great 
Britain  seemingly  has  continued  to  contribute 
credits  toward  the  financing  of  American  imports 
into  the  Dominion.  This  end,  which  was  served 
before  1914  by  the  Canadian  importation  of  British 
capital,  would  appear  since  then  to  have  been  at- 
tained through  greatly  enlarged  exports  of  Cana- 
dian merchandise  to  Britain.  Moreover,  we  should 
expect  to  find  in  this  great  export  balance  of  the 
Dominion  the  means  whereby  Canada  would  be 
enabled  as  well  to  meet  her  invisible  debit  of  in- 
terest charges.  But  we  discover  that  Canada  was 
obliged  to  sell  to  the  Mother  Country  chiefly  on 
credit.  The  Dominion,  therefore,  has  been  "in  the 
position  of  selling  largely  to  a  buyer  who  cannot 
pay  cash,  and  of  buying  largely  from  a  seller  who 
demands  cash  terms."  The  inevitable  result  has 
been  a  sharp  discount  on  Canadian  funds  in  the 
American  market. 

It  was  stated  in  an  earlier  connection  that  for- 
eign exchange  operations  are  closely  related  to  the 
movements  of  international  trade.  Canada  nat- 
urally is  vitally  interested  in  the  course  of  sterling 
and  dollar  exchange,  with  the  United  Kingdom  and 
the  United  States  respectively.  It  is  to  be  noted 
that  Canada's  quotations  for  sterling  exchange, 
and  for  francs,  lire,  marks,  etc.,  are  merely  the 
New  York  quotations  for  these  exchanges  with  an 
allowance  for  the  existing  premium  or  discount  on 
American  funds  quoted  in  Montreal  and  Toronto. 


THE  CANADIAN  BALANCE  OF  TRADE    141 

Thus  on  October  29,  1920,  the  rate  for  demand  ster- 
ling bills  in  New  York  was  about  |3.47,  while  in 
Toronto  it  stood  at  |3.83.  The  Toronto  quotation 
was  higher  to  the  extent  of  the  premium  on  New 
York  funds  which  at  that  time  amounted  to 
10  9/10  per  cent. 

In  explaining  the  process  by  which  innumerable 
transactions  in  foreign  exchange,  occurring  daily 
in  thousands  of  banks  in  the  United  States  and 
Canada,  lead  to  the  adjustment  of  the  rate  of  ex- 
change, Mr.  Stewart  Patterson  points  out  that 
"New  York  is  the  recognized  foreign  exchange  mar- 
ket of  the  continent,  and  banks  throughout  the 
country  having  exchange  to  sell  or  buy  do  so 
through  their  New  York  correspondents."  ^  Con- 
tinuing, he  adds  that  "some  New  York  banks  will 
have  exchange  to  sell,  others  orders  to  buy,  and 
the  scarcity  or  abundance  of  the  bills  of  exchange 
on  any  country  is  promptly  disclosed  by  competi- 
tion, and  the  rates  adjust  themselves  accordingly. 
Foreign  exchange  brokers,  as  they  are  called,  act 
as  intermediaries  between  buyers  and  sellers  in 
New  York.  As  the  factors  which  regulate  the  sup- 
ply and  demand  are  constantly  changing,  the 
brokers  must  keep  in  close  touch  with  the  market 
and  with  their  clients."  The  ruling  rates  in  New 
York  are  daily  telegraphed  to  Canadian  banks  and 
brokers,  and  these  rates  are  made  applicable  to 
Canada  after  the  discount  or  premium  on  New 
York  funds  has  been  taken  into  account. 

^  Stewart  Patterson,  "Domestic  and  Foreign  Exchange,"  p.  43. 


142      INTERNATIONAL  TRADE  BALANCE 

Exchange  is  a  commodity,  and  like  any  other 
commodity  its  value  is  subject  to  the  laws  of  supply 
and  demand.  Thus,  disregarding  the  invisible 
items  for  the  moment,  "if  Canadian  exports  to  the 
United  States  are  equal  to  the  exports  of  the 
United  States  to  Canada,  exchange  will  be  at  par. 
If  Canadian  exports  are  the  larger,  New  York 
funds  will  be  plentiful  in  Montreal,  and  will  be 
quoted  at  a  discount.  If  the  imports  exceed  the 
exports,  New  York  funds  will  be  in  demand  in 
Montreal  and  the  rate  will  be  at  a  premium."  Al- 
though, as  stated  elsewhere,  the  exports  and  im- 
ports of  merchandise  are  the  principal  factors  of 
international  indebtedness,  there  are  other  im- 
portant elements,  the  so-called  invisible  items, 
which  influence  the  foreign  exchanges  and  the  bal- 
ance of  international  payments. 

Inasmuch  as  gold,  under  normal  conditions,  can 
be  transferred  between  Montreal  and  New  York 
for  about  70  cents  per  |1000,  or  approximately 
5/64  of  1  per  cent  on  either  side  of  par,  it  follows 
that  a  bank,  as  a  rule,  would  bring  gold  to  Canada 
as  soon  as  a  rate  of  5/64  per  cent  discount  was 
quoted,  or  ship  gold  to  New  York  when  5/64  per 
cent  premium  was  reached.  Before  the  war  New 
York  funds  in  Canada  (in  other  words,  the  price 
of  American  exchange)  fluctuated  so  little,  having 
a  range  of  only  about  %  of  1  per  cent  between  the 
gold  points,  that  the  banks  as  a  rule  charged  a  flat 
rate  irrespective  of  market  conditions  on  all  but 
the  large  transactions.    It  is  perhaps  true  that  the 


THE  CANADIAN  BALANCE  OF  TRADE    143 

public  generally  did  not  look  upon  New  York  funds 
as  foreign  exchange.  The  charge  made  by  a  bank 
when  negotiating  a  check  on  New  York  came,  more 
or  less  generally,  to  be  looked  upon  as  a  bank  com- 
mission. As  a  consequence  there  are  still  some 
who  persist  in  regarding  the  price  paid  for  New 
York  funds  as  a  bank  commission,  or  charge  for 
service.  Since  1914,  the  price  of  American  ex- 
change has  fluctuated  widely,  ranging  from  about 
11/4  per  cent  discount  to  I914  per  cent  premium. 
This  variation,  made  possible  largely  by  the  prac- 
tical elimination  of  free  gold  shipments  between 
the  two  countries  with  their  steadying  influence, 
has  led  the  banks  to  abandon  the  flat  rate  and  to 
allow  or  charge  their  customers  a  premium  or  dis- 
count as  the  case  may  be. 

The  relation,  prior  to  1914,  between  the  balance 
of  trade  and  the  foreign  exchange  rates  in  the  case 
of  Canada  and  her  neighbor  to  the  south  has  been 
concisely  set  forth  by  Mr.  Stewart  Patterson  in  the 
Journal  of  the  Canadian  Bankers'  Association: 

"Until  1912,  New  York  funds  in  Canada  were 
generally  at  a  discount,"  he  reminds  us,  "averag- 
ing between  1/64  to  1/32  of  1  per  cent,  and  this 
in  the  face  of  the  fact  that  the  so-called  'balance 
of  trade'  was  always  against  Canada.  In  other 
words,  imports  from  the  United  States  greatly 
exceeded  Canadian  exports  to  the  United  States 
by  some  |250,000,000  a  year,  and  yet  the  rate  of  ex- 
change was  generally  in  favor  of  Canada.  This 
anomalous  condition  was  due  principally  to  the 
steady  flow  of  British   and  foreign   capital  into 


144      INTERNATIONAL  TRADE  BALANCE 

Canada  during  the  period  referred  to,  the  relative 
exchange  operations  being  effected  through  New 
York.  With  the  diminution  of  the  volume  of 
these  investments,  and  the  constantly  increasing 
remittances  to  Europe  on  account  of  dividends,  in- 
terest, etc.,  the  position  gradually  reversed,  and 
between  1912  and  1914  the  tendency  of  the  market 
for  New  York  funds  has  been  more  or  less  against 
Canada,  the  average  working  out  at  par  or  a  slight 
premium."  ^ 

During  the  later  years  of  the  war  Britain's  abil- 
ity to  pay  cash  for  Canadian  products  was  se- 
verely restricted,  and  as  Canada's  sales  of  new 
securities  in  the  British  market  were  largely  dis- 
continued, it  was  no  longer  possible  to  sell  sterling 
exchange  in  New  York  in  sufficient  quantity  to  pro- 
vide for  the  balances  due  to  the  United  States  on 
trade  account.  It  was  possible,  it  is  true,  for  a 
time  to  sell  in  the  American  market  securities  which 
formerly  would  have  been  taken  by  England,  and 
so  long  as  this  state  of  affairs  prevailed  the  credits 
thus  created  in  New  York  largely  sufficed  to  enable 
Canada  to  finance  her  excess  purchases  of  Amer- 
ican merchandise.  But  even  these  sales  of  Cana- 
dian securities  suffered  a  reduction  in  1917,  when 
the  United  States  entered  the  war.  In  the  mean- 
time, the  Canadian  merchandise  trade  balance  came 
to  be  marked  by  a  large  excess  of  exports.  So 
large  was  this  so-called  favorable  balance  in 
Canada's  trade  with  the  world  at  large  that  her 

^  Stewart  Patterson,  "New  York  Exchange  in  Canada,"  The 
Journal  of  Canadian  Bankers'  Association,  April,  1918. 


THE  CANADIAN  BALANCE  OF  TRADE     145 

unfavorable  balance  with  the  United  States  would 
seem  to  have  been  much  more  than  counterbal- 
anced. Under  normal  circumstances  this  would 
have  been  so,  and  Canada  would  have  had  a  large 
amount  of  sterling  and  other  exchange  to  dispose 
of  in  New  York.  The  net  balance  due  Canada, 
after  meeting  her  adverse  merchandise  balance  with 
the  United  States,  would  have  had  the  effect  of 
depressing  in  the  Dominion  the  rate  of  American 
exchange. 

But,  as  has  been  stated  above,  a  large  part  of 
this  favorable  balance  of  the  Dominion  represented 
exports  sold  to  Britain  and  other  Allies  on  a  time 
basis.  The  trade  credits  which  were  thus  created 
in  her  favor,  Canada  was  unable  at  once  to  utilize 
in  liquidating  the  balances  due  the  United  States. 
Moreover,  it  was  not  possible  to  fall  back  upon 
gold  shipments  to  make  settlement.  As  a  result 
a  sharp  competition  arose  in  Canada  for  New  York 
funds  with  which  to  pay  American  exporters  and 
other  creditors  in  the  United  States.  That  the  de- 
mand for  such  funds  has  been  very  vigorous  is  at 
once  revealed  by  the  course  of  American  exchange. 
The  chart  below  shows  the  fluctuations  in  the  cost 
of  New  York  exchange  in  Montreal  during  the  ten 
years  from  1910  to  1919.  The  movement  is  ex- 
pressed, it  will  be  noted,  in  premium  or  discount  in 
dollars  per  flOOO,  and  not  in  percentages. 

The  narrow  limits  within  which  exchange  fluc- 
tuated prior  to  1914  are  indicated  in  the  following 
diagram.     The  height  reached  by  New  York  ex- 


146       INTERNATIONAL  TRADE  BALANCE 


change  during  the  last  months  of  1919  was,  how- 
ever, exceeded  during  the  following  year.  This 
fact  appears  in  the  graph  which  follows.  The  value 
of  the  American  dollar  in  Canada  is  shown  on  page 

Fluctuations  from  Par  of  New  York  Exchange  in  Montreal^ 

(Premium  or  Discount  per  $1,000.) 

1910     1911    1912     1913    1914     1915    1916     1917    1918     1919 


$90 

80 
70 
60 
50 
E     40 

cc: 

30 

20 

10 

Par 

g    $10 
o 

I     20 


1 

i' 

Aa 

H 

r 

-u      / 

a 

^, 

AaaJ 

u 

$90 
I  80 

70 
60 
50 
40 
30 
20 
10 
Par 
$10 


1910     1911     1912    1913    1914     1915    1916     1917    1918    1919 


20 


147  for  the  period  from  January,  1917,  to  April, 
1921.  In  this  instance,  the  fluctuations  are  ex- 
pressed on  a  percentage  basis.  Moreover,  the  high- 
est and  lowest  values  for  each  month  are  recorded, 
whereas  in  the  preceding  case  the  average  rate  only 
was  depicted. 

^  The  Monetary  Times,  January  9,  1920,  p.  46. 


THE  CANADIAN  BALANCE  OF  TRADE    147 

Although,  as  has  already  been  stated,  Canadian 
quotations  of  sterling  exchange  represent  sterling 
quotations  in  New  York  plus  or  minus  the  premium 

Monthly  Variation   of  Value  of  the   American   Dollar  in 
Can.aj>a/     January,  1917-April,  1921 

1918         1919         1920         1921 


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or  discount  existent  at  the  time  on  American  funds 
in  the  Dominion,  the  course  of  sterling  exchange 
and  that  of  New  York  exchange  naturally  do  not 

^  Weekly  Bulletin,  Department  of  Trade  and  Commerce,  Ottawa, 
May  30,  1921,  p.  861. 


148      INTERNATIONAL  TRADE  BALANCE 

run  parallel  to  one  another  at  all  times.  In  the 
diagram  which  follows,  a  picture  is  presented  of  the 
fluctuations  in  Montreal  of  both  sterling  and  dollar 


Fluctuations    of   Sterling   RateIs   and   of   the   Premium   on 
United   States   Funds  * 


Am, 
Funds 

1 

Sterl- 
ing 
4.60 

1919 

Dec. 

1920 
Jan. 

1920 
Feb. 

1920 

Mar. 

1920 

April 

1920 

May 

1920 

June 

1920 

July 

1920 
Aug. 

1920 
Sept. 

1920 
Oct. 

1920 

Nov. 

Am. 

Funds 
1 

Sterl- 
ing 
4.60 

2 

4.55 

2 

4.55 

3 

4.50 

ds 

A 

\ 

3 

4.50 



United  States  Fur 

4 

4.45 

\ 

4 

4.45 

5 

4.40 

T 

J 

I 

5 

4.40 

6 

4.35 

1 
1 

A 

6 

4.35 

7 

4.30 

1 
I 

\ 

7 

4.30 

8 

4.25 

'A 

\ 

\ 

J 

8 

4.25 

9 

4.20 

A 

I  V 

1 

n    ] 

r 

t 

9 

4.20 

10 

4.15 

I 

i 

n 

I 

l\ 

10 

4.15 

11 

4.10 

\ 

ri 

^ 

V 

'\ 

1 

11 

4.10 

12 

4.05 

/ 

\5 

I 

1 

1^ 

12 

4.05 

13 

4.00 

V 

\ 

\   . 

ri 

1 

1 

1 

13 

4.00 

14 

3.95 

\ 

iA 

1  * 

;   / 

/^ 

v 

14 

3.95 

15 

3.90 

i) 

/ 

1/ 
1' 

K 

15 

3.90 

16 

3.85 

ii 

1 

1 

n 

A 

16 

3.85 

17 

3.80 

1  *  * 

1 

1 

'  \ 

V. 

tA 

17 

3.80 

18 

3.75 

r 

18 

3.75 

3.70 

i 

3.70 

*  Monthly  Letter  of  Royal  Bank  of  Canada,  January,  1921. 


THE  CANADIAN  BALANCE  OF  TRADE    149 

exchange  during  the  twelve  months  ended  No- 
vember 30,  1920.  The  graph  is  constructed  upon 
the  basis  of  four  quotations  each  month  of  both 
sterling  rates  and  the  premium  on  American 
funds.  They  comprised  the  high  and  low  rec- 
ords for  every  fortnight.  During  the  early  months 
of  the  period  the  two  exchanges  appeared  to 
move  more  or  less  in  sympathy  with  one  an- 
other. With  a  decline  in  sterling,  the  premium 
on  the  American  dollar  increased,  and  vice  versa. 
Later,  this  no  longer  appeared  to  be  the  case. 
During  the  latter  part  of  August,  September, 
and  October  the  price  of  sterling  fell  rapidly,  a 
decline  also  appearing  in  the  premium  on  New 
York  funds.  Both  conditions  were  to  be  at- 
tributed to  the  same  cause — wheat.  At  that  season 
Canada  was  selling  wheat,  and  England  was 
buying. 

It  is  of  course  obvious  that  when  New  York  ex- 
change is  at  a  premium  in  Canada,  Canadian  funds 
are  at  a  discount  in  New  York.  In  consequence  of 
the  depreciation  which  Canadian  exchange  has  suf- 
fered in  the  New  York  market,  the  position  of  the 
Canadian  buyer  of  American  goods  is  not  a  favor- 
able one.  Yet,  his  position  is  probably  much  bet- 
ter than  that  of  many  others.  At  the  present  time 
Canadian  exchange  is  less  depreciated  in  New  York 
than  that  of  most  other  commercial  countries.  The 
exchange  rates  on  the  principal  commercial  na- 
tions, as  quoted  in  New  York  on  June  27,  1921, 
were  as  follows: 


150       INTERNATIONAL  TRADE  BALANCE 

Eate  in  Cents 


Canada   . . . 
Germany    . 

Italy    

Belgium  . . 
France  . . . 
England  .  . 
Switzerland 
Holland  . . 
Denmark  . 
Norway  . . 
Sweden  . . . 
Spain  . . . . 
Argentina 
Japan    .... 


Normal 


$1.00 
.2382 
.1930 
.1930 
.1930 
4.8665 
.1930 
.4020 
.2680 
.2680 
.2680 
.1930 
.9648 
.4985 


June  21 


.8825 
.0135 
.0595 
.0805 
.0807 
3.76 
.17 
.3315 
.1705 
.1450 
.2245 
.1320 
.6850 
.48 


Per    cent    of 
Depreciation 


11% 

94% 

69 

58 

58 

223^ 

12 

17^ 

361/2 

46 

16% 

311/2 

29 

3% 


The  discount  on  Canadian  funds  in  the  United 
States  has  the  effect  of  increasing  the  price,  in 
Canadian  currency,  of  American  goods  to  the 
Canadian  purchaser.  The  apparent  hardship  thus 
imposed  upon  the  Canadian  importer  carries  with 
it,  however,  an  apparent  advantage  to  some  fellow 
citizens  of  his.  The  Canadian  importer  who  is 
obliged  to  buy  New  York  funds  with  which  to  pay 
for  his  American  purchases  does  not  procure  those 
funds  from  an  American  dealer.  Instead  he  buys 
the  necessary  New  York  funds,  or  more  accurately 
the  right  to  funds  in  New  York,  from  a  Canadian 
in  possession  of  such  a  right.  To  be  sure,  the  in- 
terchange between  the  two  is  normally  effected 
through  the  banks.  The  essential  fact,  however, 
remains  that  he  who  normally  provides  the  supply 
of  exchange  which  the  importer  is  obliged  to  buy  is 
not  an  American,  but  instead  the  Canadian  who 


THE  CANADIAN  BALANCE  OF  TRADE    151 

may  have  New  York  funds  for  sale,  one  exporting 
to  the  United  States  it  may  be.  Thus  the  American 
exporter  of  goods  to  Canada  receives  merely  the 
face  amount  of  the  invoice.  The  cost  to  the  im- 
porter in  Canada  represents  the  American  price, 
plus  the  exchange  premium,  plus  customs  duty  and 
transportation  charges.  On  the  other  hand,  the 
cost  of  Canadian  goods  to  the  American  importer 
represents  the  Canadian  price,  plus  transportation 
charges  and  duty,  but  minus  exchange. 

Considerable  ambiguity  is  occasioned  by  the  fact 
that  the  term  dollar  is  alike  applied  to  the  mone- 
tary unit  of  both  Canada  and  the  United  States. 
While  the  two  are  normally  of  equal  value,  the 
Canadian  dollar  at  present  (June,  1921)  has  a 
value  not  quite  ninety  per  cent  of  that  of  the 
American  unit.  There  is  a  difference  in  the  gen- 
eral level  of  prices  in  the  two  countries,  which 
probably  approximates  roughly  the  discount  on  the 
Canadian  dollar.  The  depreciation  of  the  Cana- 
dian currency  is  the  explanation  fundamentally  of 
both  the  discount  of  the  Canadian  dollar  in  the 
United  States  and  the  disparity  in  prices  between 
the  two  countries. 

Contraiy  to  a  view  sometimes  expressed,  the 
banks  of  the  country  are  not  to  be  held  respon- 
sible for  the  discount  on  Canadian  funds  in  the 
United  States.  The  situation  has  not  been  brought 
on  by  some  hidden  and  sinister  manipulation  by 
the  banks.  In  exchange  transactions  the  bank 
charges  a  commission,  whether  the  rate  be  at  par 


152       INTERNATIONAL  TRADE  BALANCE 

or  far  removed  from  it.  "To  the  banker  the  situ- 
ation is  a  nuisance,"  we  are  assured.  "He  makes 
no  more  in  selling  a  draft  now  than  he  would  under 
normal  conditions,  frequently  not  so  much."  Nor 
is  the  depreciation  of  the  Canadian  dollar  in  the 
American  market  to  be  regarded  as  evidence  of 
commercial  selfishness  on  the  part  of  the  United 
States.  Instead,  the  exchange  rate  should  be 
looked  upon  as  a  gauge  automatically  registering 
changes  in  the  volume  and  character  of  interna- 
tional transactions  of  a  commercial  and  financial 
nature. 

The  function  of  the  foreign  exchanges  may  be 
likened  to  that  of  the  thermometer.  The  latter 
measures  the  temperature.  "It  does  not  create 
it,"  we  are  reminded  by  Mr.  F.  A.  Vanderlip,  "and 
stoking  the  furnace  is  obviously  the  thing  that 
must  be  done  rather  than  to  spend  time  grumbling 
about  the  thermometer.  Just  so  w^ith  the  ex- 
changes. The  quotation  of  exchange  registers  the 
direction  and  the  extent  by  which  the  total  im- 
portations and  exportations  of  a  country  are  out 
of  balance.  It  is  no  more  a  matter  that  can  be 
corrected  by  bankers,  who  happen  to  be  the  men 
who  hold  the  visible  gauge  that  marks  the  fluctu- 
ations of  the  exchanges,  than  the  temperature 
could  be  regulated  by  some  attempt  to  control  the 
movements  of  the  mercury  in  the  bulb  of  the  ther- 
mometer by  other  means  than  altering  the  general 
temperature  that  surrounds  that  instrument."  ^    A 

^  Vanderlip,  "What  Happened  to  Europe,"  p.  91. 


THE  CANADIAN  BALANCE  OF  TRADE     153 

further  analogy  appears  in  the  case  of  a  pair  of 
scales.  If  one  scale-pan  is  more  heavily  weighted 
than  the  other,  at  once  the  scale  indicator  or  poin- 
ter reflects  the  fact  that  the  balance  is  not  at 
equilibrium.  The  pointer,  however,  is  not  to  blame 
that  the  scales  are  out  of  balance.  Likewise  the 
exchange  rate,  the  pointer  in  the  field  of  foreign 
exchange,  is  not  at  fault  if  exchange  is  at  a  pre- 
mium or  a  discount.  The  correction  must  be  made 
by  varying  the  weights  in  the  scale-pans,  the  total 
credits  and  debits  of  the  country. 

It  has  already  been  stated,  in  another  connection, 
that  the  course  of  trade  is  influenced  by  the  fluc- 
tuations in  exchange  rates.  A  stimulating  or  de- 
pressing effect,  as  the  case  may  be,  is  felt  by  ex- 
ports and  imports  in  response  to  such  variations, 
which  must  be  taken  in  conjunction,  however,  with 
other  factors,  notably  changing  price  levels  and  the 
condition  of  the  currency.  Too  often  the  influence 
exerted  by  these  additional  factors  is  disregarded. 
For  example,  it  is  asserted,  without  reference  to 
the  qualifying  conditions,  that  the  movement  of  ex- 
change has  the  effect  of  increasing  or  decreasing 
the  measure  of  protection  present  in  the  customs 
tariff.  It  is  asserted  that  when  foreign  exchange 
is  at  a  premium  it  necessarily  operates  as  an  in- 
crease in  the  customs  rates,  thus  discouraging  im- 
ports. With  a  premium  in  Canada  of  twelve  per 
cent  on  American  exchange  the  result  must  be,  it 
is  declared,  increased  protection  against  American 
goods.    And  in  England,  France,  Italy,  and  other 


154      INTERNATIONAL  TRADE  BALANCE 

countries  where  the  premium  on  New  York  ex- 
change is  still  higher,  the  importation  of  American 
goods  is  subject  to  a  correspondingly  greater  dis- 
couragement. Conversely,  a  premium  on  exchange 
is  said  to  affect  exports  in  the  opposite  fashion.  As 
a  result  of  the  exchange  situation  between  Canada 
and  the  United  States,  the  duties  in  the  American 
tariff  must  be  rendered  less  effective  against  ex- 
ports from  Canada.  Similarly,  the  premium  in 
Great  Britain  on  Canadian  exchange  would  have 
the  effect  of  stimulating  British  exports  to  the  Do- 
minion and  hampering  British  imports  therefrom. 
The  case,  however,  is  not  so  simple.  In  some  in- 
stances the  premium  on  foreign  exchange  has  the 
effect  outlined  above,  in  some  cases  its  effect  is 
more  than  neutralized  by  the  other  factors  to  which 
reference  has  been  made,  so  that  the  total  effect  is 
exactly  the  reverse.  An  illustration  will  perhaps 
suffice  to  make  this  clear.  During  the  year  1919, 
French  exchange  was  subject  to  a  depreciation  of 
fifteen  to  forty-five  per  cent.  French  francs  sold 
in  Paris  at  six  or  seven  to  the  dollar  as  compared 
with  5.18  to  the  dollar  on  the  basis  of  par.  In 
consequence  of  this  premium  on  American  ex- 
change, averaging  perhaps  twenty-five  per  cent, 
the  importation  of  American  goods  into  France,  ac- 
cording to  the  views  outlined  above,  must  have 
suffered  discouragement.  And  this  must  have  been 
so  for  the  reason  that  the  French  franc,  in  a  con- 
dition of  depreciation,  would  purchase  less  of 
American  goods   than   under  normal   conditions. 


THE  CANADIAN  BALANCE  OF  TRADE    155 

But  meantime  prices  in  France  were  three  times 
as  high  as  they  were  before  1914.  Under  these  con- 
ditions it  naturally  was  profitable  to  export  goods 
from  the  United  States  to  France.  By  the  same 
token,  the  French  importer  of  American  goods  was 
greatly  stimulated  to  increase  his  purchases.  The 
fear  became  general  that  goods  from  the  United 
States  would  flood  France  to  the  injury  of  the  do- 
mestic industries.  For  a  time,  as  a  consequence, 
the  French  Government  maintained  the  war  pro- 
hibitions on  imports.  Since  1919  the  situation  in 
France  in  respect  of  exchange  and  prices  has  been 
largely  reversed. 

A  premium  on  exchange  may,  therefore,  have  an 
influence  in  either  direction,  as  has  been  pointed 
out  elsewhere  at  greater  length.^  If  the  premium 
on  foreign  exchange  has  risen  higher  than  the  gen- 
eral level  of  prices,  exports  will  be  stimulated,  if 
it  has  risen  less,  imports  will  be  stimulated.  If  a 
state  of  equilibrium  has  been  reached  between 
prices  and  the  rate  of  foreign  exchange,  there  will 
be  no  artificial  stimulus  on  either  exports  or  im- 
ports. This  so-called  equilibrium,  as  stated  else- 
where, is  attained  when  the  increase  of  prices  cor- 
responds with  the  increase  in  foreign  exchange 
rates  (i.  e.,  with  the  increase  in  the  price  of  gold). 

On  account  of  the  wide  fluctuations  in  the  rates 
of  exchange  and  their  possible  effects,  stimulating 
or  otherwise,  upon  the  course  of  trade,  customs 

'  This  question  has  received  more  extended  treatment  in  Chap- 
ter I. 


156      INTERNATIONAL  TRADE  BALANCE 

regulations  in  various  countries  have  been 
amended  to  meet  the  situation.  Formerly  the 
value  of  imported  goods  in  foreign  currency  was 
converted  into  terms  of  Canadian  dollars  at  the 
gold  par  rate  of  exchange,  and  customs  duties  were 
assessed  in  accordance  therewith.  This  practice 
continued  for  a  considerable  time,  notwithstanding 
the  extraordinary  deviation  of  the  exchange  rates 
from  par.  This  meant,  for  example,  that  goods 
from  France  valued  in  the  currency  of  that  country 
at  100  francs  would  be  assessed  for  duty  on  the 
basis  of  a  value  of  |19.30,  while  at  the  time  100 
francs  might  actually  be  worth  no  more  than  |8. 
England  was  the  country  principally  affected,  in- 
asmuch as  Canada  imports  a  much  larger  volume 
of  goods  from  Britain  than  from  any  other  countiy 
whose  money  is  at  a  discount  in  the  Dominion. 
The  customs  law  was  amended  in  the  spring  of 
1920  to  allow  the  conversion  of  depreciated  cur- 
rencies at  the  current  rates  of  exchange.  By  a  fur- 
ther change  in  the  act,  to  which  assent  was  given 
on  June  4,  1921,  it  was  provided  that  appreciated 
currencies  should  be  treated  in  the  same  fashion. 
The  one  important  currency  standing  at  a  premium 
in  Canada  is  that  of  the  United  States.  But  since 
seventy  per  cent  approximately  of  Canadian  im- 
ports come  from  that  country  the  change  is  of 
some  moment.  If  thirty  per  cent  be  taken  as  the 
average  duty  in  the  Canadian  tariff  on  manufac- 
tured goods,  and  if  ten  per  cent  be  regarded  as  the 
average  premium  on  American  money,  the  new  pro- 


THE  CANADIAN  BALANCE  OF  TRADE    157 

vision  has  the  same  effect  as  an  increased  duty  of 
three  per  cent  on  the  old  basis  of  valuation.  This 
statement  does  not  imply  the  presence  of  a  bounty 
or  of  an  obstruction  upon  the  movement  of  ex- 
ports. The  two  questions  though  related  are  quite 
distinct.  This  form  of  increased  protection  will 
doubtless  continue  until  Canadian  currency  is  once 
more  on  a  par  with  that  of  the  United  States. 

The  customs  amendment  of  1921  provides  also 
that,  for  the  purpose  of  computing  customs  duty, 
the  value  of  goods  shall  in  no  case  be  less  than  the 
cost  of  production  and  a  reasonable  profit  thereon, 
and  that  the  currency  in  which  the  goods  are  in- 
voiced shall  not  be  valued  at  less  than  fifty  per  cent 
of  the  standard  of  the  country  to  which  it  belongs. 
This  provision  doubtless  is  directed  mainly  against 
countries  such  as  Germany,  in  which  the  currency 
depreciation,  as  reflected  in  the  price  level,  has  not 
kept  pace  with  the  depreciation  of  the  currency  in 
foreign  exchange.  Thus  the  depreciation  of  the 
German  mark  in  the  exchanges  has  not  yet  been 
fully  reflected  in  higher  production  costs  at  home. 

To  remedy  the  adverse  rate  of  exchange  with  the 
United  States  various  suggestions  have  been  of- 
fered. It  has  been  urged  that  exports  be  enlarged 
through  increased  production,  and  that  imports  be 
diminished  by  curtailing  the  importation  of  so- 
called  nonessential  articles  and  of  goods  which  can 
be  produced  in  the  Dominion.  Canadians  have  also 
been  urged  to  insure  with  Canadian  companies,  on 
the  ground  that  the  premiums  annually  remitted 


158       INTERNATIONAL  TRADE  BALANCE 

abroad  to  foreign  life  and  fire  insurance  companies 
affect  the  exchange  rate  adversely. 

It  is  stated  further  that  what  the  people  of  the 
Dominion  obviously  need  is  to  reduce  their  pur- 
chases from  the  United  States  and  to  increase  them 
from  Great  Britain  and  the  other  countries  which 
owe  gold  to  the  Dominion,  and  which  will  thereby 
be  better  enabled  to  make  payment  in  goods.  The 
present  state  of  the  exchanges  is  doubtless  helping 
gradually  to  bring  these  things  to  pass.  The  ex- 
changes in  Canada  appear  alike  to  place  a  penalty 
on  purchases  from  the  United  States  and  a  premium 
on  purchases  from  Great  Britain.  However,  be- 
cause of  the  production  difficulties  in  Britain  and 
the  firm  hold  which,  thanks  to  proximity  and  simi- 
lar tastes  and  habits,  the  American  producer  has 
on  the  Canadian  market,  this  process  of  readjust- 
ment will  not  be  a  rapid  one.  It  will  naturally  be 
accelerated  by  Canadian  loans  floated  in  the  United 
States  and  by  the  sale  of  securities  to  American 
investors. 


CHAPTER  V 


THE   INDIAN    TRADE    BALANCE 


In  India  the  balance  of  trade  in  the  past  stood 
out  in  contrast  to  that  of  Canada.  Whereas  the 
pre-war  trade  balance  of  the  Dominion  was 
marked  by  an  excess  of  imports,  that  of  India  was 
characterized  by  an  export  balance.  To  heighten 
the  contrast  it  may  be  noted  that,  while  the 
Canadian  excess  of  imports  was  growing  more  pro- 
nounced during  the  two  decades  preceding  the  war, 
in  India,  on  the  other  hand,  there  was  a  general  in- 
crease in  the  excess  of  exports  during  the  same 
period. 

India  has  already  been  called  a  mature  borrow- 
ing countiy.  That  she  has  been  in  this  position  for 
some  time  may  be  seen  from  the  table  which  follows. 

Bajlance  of  Teade  of  India* 
(Figures  denote  £  millions) 


Average  of  5  years  ending 

One  year 

1883-84 

1893-94 

1903-04 

19i:i-l4 

Net  excess  of  exports  in- 
cluding merchandise, 
treasure,     and     enfaced 
rupee  paper  

13.9 

14.9 

19.9 

23.1 

1  "Review  of  Trade  of  India  in  1914-15"   (Cd.  8228),  p.  120. 
159 


160      INTERNATIONAL  TRADE  BALANCE 

From  the  foregoing  statement  we  note  that  In- 
dia, before  the  war,  had  a  so-called  favorable  mer- 
chandise balance  which  amounted  to  about  |100,- 
000,000  a  year.  Before  attempting  an  estimate 
of  the  balance  of  India's  invisible  factors,  let  us 
take  account  of  the  various  items  which  go  to 
make  up  the  balance  of  her  international  debits 
and  credits.     They  are  as  follows: 

1.  Merchandise  imports  and  exports. 

2.  Payments  to  foreign  shipping  interests.  As 
is  well  known,  India  is  forced  to  meet  heavy  charges 
on  account  of  the  transportation  of  her  goods  in 
foreign  bottoms,  since  there  are  few  India-owned 
steamships.  Inasmuch,  however,  as  these  charges 
are  for  the  most  part  included  in  the  declared  fig- 
ures for  imports,  it  is  to  that  extent  unnecessary 
to  make  any  further  allowance  for  them.  After 
making  reasonable  adjustments  between  shipping 
debits  against  India  and  certain  credits  in  favor 
of  that  country  on  account  of  port  and  pilotage 
dues,  cost  of  coal  and  stores  purchased  in  India, 
wages  of  the  crew  spent  in  India,  etc.,  it  is  prob- 
able that  the  net  result  is  a  minor  debit  against  the 
country  of  not  less  than  £33,000,  over  and  above  the 
amount  for  freight  actually  included  in  the  values 
recorded  for  imports.^ 

3.  Investments  of  foreign  capital  in  India  and 
the  payment  of  interest  charges  by  India. 

4.  Other  debits  against  India  include  various 
miscellaneous  cliarges  for  the  use  of  foreign  capital 

'  Report  for  1913-14  of  Controller  of  Currency  for  India,  p.  55. 


THE  INDIAN  TRADE  BALANCE  161 

or  credit,  by  way  of  commission,  premiums  of  in- 
surance, and  remittances  to  England  on  private  ac- 
count, as  for  example  on  behalf  of  Indians  residing 
in  England. 

5.  On  the  other  side  will  occur  a  corresponding 
credit  to  India  on  account  of  income  remittances 
from  England  (or  elsewhere  abroad)  to  persons 
resident  in  India,  such  as  British  officers  in  en- 
joyment of  independent  incomes. 

6.  Private  remittances  of  securities.  The  ef- 
fect of  this  item  is  similar  to  that  of  number 
three. 

7.  Private  imports  and  exports  of  the  precious 
metals.  In  striking  the  balance  of  accounts,  these 
should  be  treated  as  imports  and  exports  of  other 
commodities  on  private  account.  It  is  true  the  im- 
portation of  the  precious  metals  has  been  largely 
controlled  by  the  Government  since  1917. 

8.  The  transactions  of  the  Indian  Government, 
whether  in  the  form  of  loans,  remittances  of  in- 
terest, pensions,  imports  and  exports  of  the  pre- 
cious metals  or  of  other  commodities.^ 

In  somewhat  condensed  form  the  following  table 
presents  the  chief  items  of  the  foreign  trade  (i.  e., 
the  visible  exports  and  imports)  of  India  for  a 
series  of  years.^ 

^  No  account  will  be  taken  in  this  study  of  the  large  war-con- 
tributions of  capital  made  to  Britain  by  India  and  raised  largely 
in  India. 

'  "Statement  of  Moral  and  Material  Progress  and  Condition  of 
India  for  1911-12,"  p.  286. 


162      INTERNATIONAL  TRADE  BALANCE 

(Figures  denote  £  millions) 


1905-06 

1907-08 

1909-10 

1910-11 

1911-12 

Imports : 

Private    Merchandise 
Government  Stores . . 

68.7 
6.0 

86.6 
4.4 

78.0 
3.7 

86.2 
2.9 

92.4 
3.6 

Total    

74.7 
^107.9 

91.1 
118.3 

81.7 
125.3 

89.1 
139.9 

96.0 

Exports : 
Private  Merchandise. 

152.0 

Net    Exports    of    Mer- 
chandise     

33.2 

21.1 
10.3 

27.2 

28.2 
3.6 

43.6 

25.0 
4.3 

50.8 

26.5 
4.8 

56.0 

Imports   of  Treasure . . 
Exports  of   Treasure . . 

35.6 
6.9 

Net  Imports  of  Treas- 
ure     

10.8 

24.6 

20.7 

21.7 

28.7 

Net  Excess  of  Exports, 
including       Merchan- 
dise and  Treasure.  .  . 

22.4 

2.6 

22.9 

29.1 

27.3 

*  Including  government  stores  :  a  very  small  item,  in  no  year  ex- 
ceeding £100,000. 

After  taking  into  consideration  all  debit  and 
credit  transactions  (the  invisible  as  well  as  the 
visible),  there  is  customarily  a  small  net  balance 
in  favor  of  India.  Occasionally,  however,  an  ad- 
verse balance  is  confronted.  For  example,  during 
the  fiscal  year  1907-08  there  resulted  a  net  debit 
against  India.  It  was  attributed  to  a  famine  in 
India,  a  credit  crisis  in  the  United  States,  and  other 
unfavorable  conditions.  Again,  during  1913-14  an 
adverse  balance  appeared.  In  that  year,  although 
gross  merchandise  exports  were  slightly  larger 
than  ever  before,  the  volume  of  gross  merchandise 
imports  was  so  much  larger  than  in  any  preceding 


THE  INDIAN  TRADE  BALANCE 


163 


year  that  the  excess  of  merchandise  exports  was 
the  smallest  in  five  years,  as  noted  in  the  following 
table.  ^  In  contrast  to  the  previous  tabulation,  no 
account  here  is  taken  of  government  stores,  railway 
equipment,  and  the  precious  metals. 

(Figures  denote  £  millions) 


1909-10 

1910-11 

1911-12 

1912-13 

1913-14 

Gross  Exports   of   Pri- 
vate Merchandise  .  . . 

Gross   Imports   of   Pri- 
vate    Merchandise 
(less    railway    plant 
and  rolling  stock )    . . 

125.3 
74.4 

139.9 
83.3 

152.0 
89.7 

164.1 
103.0 

165.9 
115.5 

Net  Export  of  Private 
Merchandise    

50.9 

56.6 

62.3 

61.1 

50.4 

In  this  statement,  no  provision  is  made  for  the 
large  quantity  of  railway  material  imported  into 
India.  In  the  painstaking  Report  for  1913-14  of 
the  Controller  of  Currency  for  India,  it  is  stated 
that  the  imports  into  India  of  railway  plant  and 
rolling  stock  during  the  fifteen  years  from  1899- 
1900  to  1913-14  inclusive  were  valued  at  £75  mil- 
lions. Of  this  amount,  however,  nearly  £60  mil- 
lions were  paid  for  by  capital  raised  in  England 
either  by  the  Government  of  India  or  by  railway 
companies.  The  balance  was  met  by  government 
remittances  from  India.  Obviously  it  would  be  mis- 
leading, therefore,  as  pointed  out  in  that  Report, 
in  making  up  India's  international  account,  to  debit 
her,  as  is  often  done,  with  the  imports  of  railway 

*  Report  for  1913-14  of  the  Controller  of  Currency  for  India, 
p.  51. 


164       INTERNATIONAL  TRADE  BALANCE 

material,  unless  there  be  entered  as  corresponding 
credits  (a)  the  net  capital  raised  in  Great  Britain 
to  purchase  the  material  and  (5)  the  export  of 
funds  from  India  in  the  form  of  government  remit- 
tances, to  the  extent  to  which  these  are  applied 
to  capital  outlay.  After  making  the  necessary  ad- 
justments to  meet  this  condition,  after  making  pro- 
vision for  such  credit  items  as  foreign  loans  con- 
tracted by  industrial  companies  and  the  so-called 
"port-trusts,"  and  after  taking  account  of  such 
debit  items  as  interest  charges  on  foreign  loans, 
private  remittances  abroad,  the  importation  of  bul- 
lion, etc.,  the  Report  presents  a  net  balance  sheet 
for  India  for  a  series  of  years.  The  results  may 
be  epitomized  as  follows :  ^ 

(Figures  denote  f  millions) 


Average  for  the 

10-Year    Period 

1899-1900    to 

1908-09 

o 

1— 1 

1 

05 

o 
o> 
f— 1 

1— 1 

2 

l-H 

02 

1— 1 

05 

CO 
1—1 

1 

(M 

1—1 

05 
I— 1 

21 

1 

05 

Total  for  5-Year 

Period 

1909-1910    to 

1913-14 

The   net    or    "unex- 
plained"  balance. 

0.5 

2.2 

5.2 

3.1 

2.0 

6.0* 

6.3 

*  The  balance  for  1913-14  is  minus  £6,000,000. 

It  is  admitted  that  many  of  the  figures  in  this 
balance  sheet,  although  based  on  the  most  reliable 
available  data,  are  estimates  only.  The  abnormal 
balance  for  the  year  1913-14  was  due,  probably,  to 

*  Keport  for  1913-14  of  the  Controller  of  Currency  for  India, 
p.  52. 


THE  INDIAN  TRADE  BALANCE  165 

certain  unusual  circumstances.  Owing  to  the  large 
accumulations  in  China  of  opium  exported  by 
Indian  merchants,  the  price  of  opium  did  not 
enable  them  to  realize  in  full  on  such  exportation, 
with  the  result  that  this  credit  to  India  was  being 
met  gradually  and  therefore  was  partly  extended 
over  into  the  succeeding  year.  It  is  believed  also 
that  the  exchange  banks  in  India  strengthened 
their  balances  during  this  year.  Furthermore,  it 
is  probable  that  the  imports  of  capital  into  India 
in  the  form  of  mill  machinery,  railway  rolling  stock, 
and  the  like,  were  larger  than  usual,  or  else  (and 
this  would  have  the  same  effect)  that  some  portion 
of  the  profits  of  existing  companies  were  retained 
in  India  for  the  same  purpose. 

The  degree  to  which  India  has  been  dependent 
in  the  past  on  foreign  capital  for  her  productive 
enterprises  can  scarcely  be  exaggerated.  The  total 
capital  outlay  on  railways  to  the  end  of  the  fiscal 
year  1913-14  was  £369,265,000  (about  |1,800,000, 
000).^  On  irrigation  projects,  the  other  chief 
branch  of  public  works,  the  capital  expenditure  to 
the  end  of  the  year  1912-13  amounted  to  £43,442,253 
(about  1215,000,000) .-  The  United  Kingdom  owns 
and  subscribes  the  great  bulk  of  the  foreign  is- 
sues of  Indian  securities.  That  this  is  so  may  be 
inferred  from  a  condensed  statement  of  the  debt  of 
India.    The  total  debt  is  classified  in  the  accounts 

^Report  for  1913-14  of  Railway  Department,  vol.  II,  p.  271. 
^  "Statement  of  Moral  and  Material  Progress  and  Condition  of 
India  for  1912-13,"  p.  77. 


166       INTERNATIONAL  TRADE  BALANCE 

as  (1)  Public  Works  Debt  and  (2)  Ordinary  Debt. 
The  amount  entered  as  belonging  to  the  former 
category  is  the  equivalent  of  the  capital  expendi- 
ture which  has  been  incurred  by  the  State  on  public 
works,  together  with  the  amount  advanced  to  rail- 
way companies  for  disbursement;  Ihe  "Ordinary 
Debt"  consists  of  the  remainder.  The  classification 
of  the  debt  outstanding  on  March  31, 1913,  follows :  ^ 

( Figures  denote  £  millions ) 

(a)  Public  Works  Debt:— 

Debt  for  railways   £211.8 

Debt  for  irrigation  works     37.6 

For  initial  expenditure  on  new  capital  at  Delhi   ....       0.1 

Total  of  Public  Works  Debt   £249.5 

(b)  Ordinary  Debt   (the  balance)    24.9 

Total  permanent  debt,  March  31,  1913   £274.4 

Of  this  total  indebtedness,  £179  millions  was 
held  in  England,  while  the  remainder,  £95  millions, 
was  held  in  India. 

That  the  relation  between  Indian  exports  and 
imports  must  be  affected  by  the  continued  prac- 
tice of  borrowing  abroad  is  obvious.  In  large  meas- 
ure the  loans  secured  by  India  in  England  for  rail- 
way development,  irrigation,  etc.,  have  taken  the 
form  of  imports  into  India  of  railway  rolling  stock 
and  other  equipment.  In  1911-12,  for  example,  the 
capital  outlay  on  railways,  irrigation,  etc.,  was 
£9,501,700,  of  which  £5,082,700  was  spent  in  Eng- 
land and  £4,419,000  in  India.  The  following  table 
will   further  illustrate  the  past   relationship   ex- 

^  "Statement  of  Moral  and  Material  Progress  and  Condition  of 
India  for  1912-13,"  p.  20. 


THE  INDIAN  TRADE  BALANCE 


167 


istent  between  capital  investments  and  imports  of 
materials.^ 


Indian    Railway 

Company  Issues 

in  London 

Imports  of  Railway  Plant  and 
Rolling  Stock 

Year 

From 
United    Kingdom 

From 

Elseivhere 

1907-08    ... 
1908-09    ... 
1909-10    ... 
1910-11    ... 

£2,200,000 
6,894,200 
3,183,900 
3,100,000 

£4,656,597 
4,745,709 
3,251,473 

2,528,984 

£143,953 
200,891 
375,591 
301,237 

It  has  been  pointed  out  elsewhere  that  the  effect 
of  borrowing  capital  abroad  is  to  swell  merchan- 
dise imports,  while,  on  the  other  hand,  the  in- 
terest charges  on  such  capital  will  tend  to  augment 
the  exports  of  the  borrowing  country.  Therefore 
the  customary  excess  of  merchandise  exports  of 
India  would  lead  one  to  expect  to  find  a  probable 
excess  of  invisible  debits  (such  as  interest  charges, 
remittances,  etc.)  over  imports  of  capital.  An  at- 
tempt will  be  made  to  apply  this  principle  to  con- 
ditions within  the  quite  typical  year  1911-12.  The 
amount  of  new  capital  loaned  annually  to  India 
is  included  under  two  main  heads,  namely,  that  in- 
vested in  public  works  and  that  loaned  for  pur- 
poses exclusive  of  such  enterprises.  The  total  cap- 
ital expenditure  on  railways  in  India  had  not  prior 
to  1914  exceeded  £12,500,000  in  any  one  year,  nor 
had  the  amount  expended  on  irrigation  surpassed 

'Report  of  Royal  Commission  on  Indian  Currency,  vol.  I  (Cd. 
7070),  quoted  by  Hobson,  "The  Export  of  Capital,"  p.  10. 


168       INTERNATIONAL  TRADE  BALANCE 

£2,500,000  within  any  twelve  montli  period.^  And 
a  large  portion  of  the  joint  outlay  on  public  works 
does  not  involve  foreign  loans,  inasmuch  as  a  con- 
siderable part  of  the  expense  is  met  from  income. 
The  new  capital  loaned  to  India,  for  other  than 
railway  and  irrigation  purposes,  has  been  esti- 
mated to  have  been  on  the  average  between  £2,- 
000,000  and  £3,000,000  a  year,  during  the  fifteen 
years  preceding  the  war.^  It  must  be  recalled  that 
a  large  part  of  India's  foreign  loans  enter  the 
country  in  the  form  of  railway  and  mill  equipment 
and  as  such  it  is  counted  in  merchandise  imports. 
Therefore  the  amount  of  net  capital  flowing  into 
India  annually  is  much  reduced. 

The  average  annual  capital  subscription  in 
Great  Britain,  during  the  fifteen  years  ended  in 
1914,  for  Indian  railways,  less  the  value  of  imports 
of  railway  equipment,  will  represent  the  net  capital 
raised  in  England  for  Indian  transportation  facili- 
ties. For  the  period  in  question  the  average  net 
capital  for  this  purpose  is  estimated  at  a  little  less 
than  £4,000,000  per  year.^  Applying  the  same  cor- 
rection in  the  case  of  loans  for  irrigation,  indus- 
trial plants,  etc.,  it  is  found  that  the  net  capital 
raised  in  England  on  account  of  India  for  these 
purposes  probably  did  not  exceed  on  the  average 
much  over  £1,000,000  a  year.     The  total  of  net 

*  "Statement  of  Moral  and  Material  Progress  and  Condition  of 
India,  for   1912-13,"  pp.   312-317. 

=*  Report  for  1913-14  of  Controller  of  Currency  of  India,  p.  53. 
^Ibid.,  p.  49. 


THE  INDIAN  TRADE  BALANCE  169 

capital  imports,  therefore,  amounted  annually  to 
about  £5,000,000. 

That  the  total  of  outflowing  interest  charges  and 
other  debits  is  much  larger  is  apparent  from  the 
following  table  of  Home  Charges  of  the  Govern- 
ment of  India. '^ 

Year  1911-1912 

Interest  and  management  of  debt,  and  payment  of 
interest,  etc.,  on  account  of  railways  and  irrigation 

works    £10,768,754 

Payments   in   connection  with   Civil  Departments   in 

India     233,672 

India  Office  (excluding  pensions)    184,870 

Army  and  Marine  effective  charges   1,016,597 

Stores  of  all  kinds  charged  against  revenue 1,191,371 

Furlough   allowances    988,853 

Non-effective  charges  (pensions  and  gratuities)    ....  4,481,129 

Total £18,865,246 

Undoubtedly  private  remittances  from  India 
considerably  augmented  this  total.  It  may  be 
shown  that  such  payments  amounted  roughly  to 
about  £6,000,000.  In  the  first  place,  it  has  been 
estimated  by  Indian  exchange  banks  that  net  pri- 
vate remittances  from  India  amount  to  about 
£2,000,000  per  year;  there  are  also  certain  railway 
remittances  which  do  not  pass  through  the  gov- 
ernment account  and  which  are  believed  to  reach 
a  figure  of  somewhat  over  £500,000;  in  this  cate- 
gory also  must  be  placed  interest  payable  on  for- 
eign capital  invested  in  industry  and  agriculture, 
which  amounts  to  about  £2,500,000  per  annum. 
Certain  minor  factors,   such   as  the  payment   to 

^  "Statement  of  Moral  and  Material  Progress  and  Condition  of 
India  for  1912-13,"  p.  161. 


170       INTERNATIONAL  TRADE  BALANCE 

foreign  shipping  companies,  may  be  assumed  to 
account  for  an  additional  outflow  of  not  less  than 
£500,000.  Therefore,  the  total  of  invisible  debits 
against  India,  including  both  the  government 
charges  and  private  remittances,  may  be  placed  at 
about  £25,000,000.  From  this  must  be  deducted 
the  invisible  credit,  in  the  form  of  annual  imports 
of  net  capital,  which  we  have  seen  to  be  about 
£5,000,000.  The  resulting  excess  of  invisible  debits 
(i.  e.,  interest  charges,  etc.,  over  and  above  the  in- 
flow of  net  capital)  for  the  year  1911-12  is,  there- 
fore, estimated  to  have  been  £20,000,000  or  over. 

It  will  be  recalled  from  earlier  figures  that  the 
net  exports  of  merchandise,  including  treasure,  for 
the  year  1911-12  amounted  to  £27,223,901.  This 
credit  balance  served  as  the  offsetting  factor  coun- 
terbalancing the  debit  balance  on  account  of  the 
invisible  items,  which  amounted,  according  to  the 
present  computation,  to  somewhat  over  t20,000,000. 
The  disparity  between  these  amounts  is  doubtless 
largely  the  outcome  of  over-conservative  estimates 
where  definite  statistics  are  not  available. 

With  ever  increasing  investments  of  foreign 
capital  in  India  and  the  accompanying  growth  of 
interest  charges,  a  continuing  and  increasing  ex- 
cess of  merchandise  exports  may  normally  be  ex- 
pected to  prevail.  During  the  past  thirty  years,  as 
already  suggested,  this  tendency  has  manifested 
itself.  Exports  have  grown  more  rapidly,  in  the 
main,  than  imports.  This  fact  is  revealed  in  the 
chart  which  follows. 


THE  INDIAN  TRADE  BALANCE 

Exports  and  Imports  of  India* 


171 


300 

280 

Total  Merchandise- 

Exports  of  Merchandise  •—-^-» 
Net  Imports  of  Treasure.- — ^ 

260 

240 

y 

L 

/ 

\ 

220 

f 

\ 

/ 

«d200 

/ 

r 

Sl80 

J 

/' 

°-160 

/ 

/ 

§140 

r 

J 

\ 

y 

/ 

=  120 

y^ 

< 

^^■^ 

A 

/ 

100 

^ 

/ 

^.-^^ 

^' 

^' 

80 

I — If    )t 

^ 

^ 

^ 

60 

J 



. — • — 

-— 1 

y/^ 

i 



-^ 

___,„---^ 

_ 

40 

==^" 

- 

20 

^-. 

^■-— ■ 

\ 

** 

■-— — — 

— — —  — * 

— •  — —  — 

— — — ■ 

"""——-J 

— — '— ^" 

300 

280 

260 

240 

220 

200  CO 

180§ 

160  I 

140  I 

120s 

100 

80 

60 


40 


^^z^-- ^   20 


*  1 — Total  Merchandise  includes  imports  and  exports,  both  pri- 
vate and  government.  2 — Imports  of  Merchandise  are  inclusive 
of  government  stores.  3— Exports  of  Merchandise  are  inclusive 
of  re-exports  and  government  stores.  4 — Net  Imports  of  Treas- 
ure are  the  imports  minus  the  exports  of  Gold  and  Silver,  both 
private  and  government. 

The  argument  that  the  excess  of  merchandise 
exports  of  India  represents  an  economic  loss  de- 
serves but  scant  attention.  The  redundant  mer- 
chandise exports  are  the  logical  result  of  India's 
excess  of  invisible  debits.  The  latter  excess  in 
turn,  as  already  mentioned,  is  to  be  attributed  to 
heavy  interest  charges  on  foreign  capital  invest- 
ments and  to  political  expenses  incident  to  the 
government  of  India.  The  investment  of  foreign 
capital  has  made  possible  for  India  the  construc- 
tion  of   35,000    miles    of   railways,    thousands  of 


172       INTERNATIONAL  TRADE  BALANCE 


miles  of  irrigation  canals,  and  a  striking  industrial 
development.  And  yet  the  mercantilist  critic  of 
Indian  affairs  will  argue  that,  because  interest 
charges  must  be  paid  to  foreign  investors  of  cap- 
ital, India  is  being  unjustly  exploited. 

The  contention  is  the  more  obviously  unfounded 
in  view  of  the  circumstances  connected  with  the 
public  debt  of  India.  Of  the  permanent  funded 
debt,  the  "ordinary"  debt  alone  imposes  a  burden 
on  the  Indian  taxpayer,  inasmuch  as  the  interest  on 
the  public  works  debt  is  charged  against  the  rev- 
enue from  railways  and  irrigation  works.  Far 
from  being  a  dead  weight  on  the  taxpayer,  the  rail- 
ways and  irrigation  works  ordinarily  yield  a 
revenue  sufficient  to  meet  not  only  their  own  in- 
terest charges,  but  also  the  remaining  charge  on 
account  of  the  ordinary  debt.  For  many  years, 
prior  to  the  war,  the  amount  of  the  ordinary  (or 
unproductive)  debt  was  subject  to  a  process  of 
reduction,  the  diminution  being  quite  substantial. 
During  the  same  period,  the  productive,  or  public 
works,  debt  was  rapidly  increased.  The  following 
table  shows  the  distribution  of  the  total  permanent 
debt  between  the  "Public  Works"  and  "Ordinary" 
heads.  ^ 

(Figures  denote  f  millions) 


Ordinary 

( Unproductive) 

Debt 


Public  Works 

(Productive) 

Debt 


Calendar  Year  1862 
March  31,  1902   . .  .  . 

March  31,   1907   

March  31,  1912    


76.0 
69.2 
37.9 
33.0 


2.4 
138.6 
196.6 
238.7 


^  "Statement  of  Moral  and  Material  Progress  and  Condition  of 
India  for  1911-12,"  p.  162;  also  ibid,  for  1901-02,  p.  143. 


THE  INDIAN  TRADE  BALANCE  173 

No  study  of  the  trade  balance  of  India  can  pro- 
ceed far  without  having  to  take  account  of  the 
problem  of  exchange.  This  problem  is  especially 
pressing  in  the  case  of  India,  by  reason  of  the  fact 
that  the  price  of  foreign  exchange  in  that  country 
is  not  only  affected,  as  elsewhere,  by  the  ordinary 
fluctuations  in  the  relative  supply  of  international 
debits  and  credits,  but  also  by  the  gold  price  of 
silver. 

The  general  bearing  of  Indian  exchange  upon 
the  foreign  trade  conditions  of  that  country  has 
been  set  forth  briefly  in  the  Imperial  Gazetteer.'^ 
The  expenditures  in  Britain  on  account  of  India 
are  normally 

"defrayed  by  the  sale  of  Council  bills  (or  telegra- 
phic transfers)  by  the  Secretary  of  State.  Since 
the  exports  of  India  exceed  her  imports,  European 
importers  must  remit  to  India  the  net  value  of 
this  excess.  For  this  purpose  they  buy  bills  on  In- 
dia, offered  by  the  Secretary  of  State;  the  latter 
pays  the  home  charges  with  the  proceeds,  and  the 
buyers  send  the  bills  to  India,  where  they  are 
cashed  by  the  Indian  Government.  As  regards  the 
Indian  exchequer  the  result  is,  therefore,  the  same 
as  if  the  amount  had  been  directly  remitted  to  the 
India  Office.  Before  the  Indian  mints  were  closed 
to  the  free  coinage  of  silver,  the  price  which  the 
Secretary  of  State  obtained  for  his  bills  was  de- 
termined by  the  gold  value  of  silver  bullion.  If 
bills  were  offered  at  a  rate  less  favorable  than  the 
market  price  of  silver,  importers  could  adopt  the 
alternative  of  purchasing  bullion  and  transmitting 

^Imperial  Gazetteer  of  India,  vol.  IV,  p.  194. 


174       INTERNATIONAL  TRADE  BALANCE 

it  to  India  for  coinage.  The  actual  form  of  the 
transactions  was  somewhat  more  complicated,  but 
the  essence  was  substantially  as  above.  Until  1871- 
72  the  gold  value  of  the  rupee  had,  except  in  one 
year,  always  exceeded  Is.  lid.  In  1872-73,  it  fell 
to  a  little  over  Is.  10%d. ;  and  thenceforward,  ow- 
ing to  the  increasing  production  of  silver,  and  its 
reduced  employment  for  monetary  purposes  due  to 
the  currency  policy  of  Germany  and  other  coun- 
tries, it  fluctuated,  with  a  constant  downward  tend- 
ency, until  in  1894-5  it  reached  the  lowest  point  of 
a  little  under  Is.  Id.  As  the  price  of  silver  fell  the 
Secretary  of  State  obtained  worse  and  worse  terms 
for  his  bills,  or  in  other  words  the  Government 
of  India  had  to  pay  a  continually  increasing  num- 
ber of  rupees  to  meet  the  sterling  expenditure  in 
England.  Thus  arose  the  principal,  though  not  the 
only,  cause  of  the  loss  by  exchange." 

The  depreciation  of  the  external  value  of  the 
rupee  had  disastrous  effects  upon  India's  foreign 
trade  as  well  as  upon  her  fiscal  relations  with  other 
countries,  notably  England.  Her  revenues  were 
received  in  India  in  silver,  but  her  obligations 
abroad  were  paid  on  the  basis  of  gold.  By  1893,  the 
gold  price  of  the  rupee  had  fallen  to  about  35fZ.,  and, 
at  this  price,  the  value  of  the  rupee  for  foreign 
exchange  purposes  was  not  over  Is.  2d.  The  finan- 
cial position  of  the  Indian  Government  became  in- 
tolerable, as  already  suggested,  for  the  loss  in- 
curred on  the  exchange,  due  to  the  declining  gold 
price  of  the  rupee,  fell  ultimately  on  the  Indian 
taxpayer.  India's  position  as  an  importing  coun- 
try was  also  adversely  affected,  although  it  is  only 


THE  INDIAN  TRADE  BALANCE  175 

fair  to  recall  that  on  the  side  of  exports  the  effect 
was  beneficial.  The  depreciation  of  the  rupee 
placed  on  the  importer  the  necessity  of  paying  more 
for  his  goods  than  their  face  value  in  rupees,  while, 
on  the  other  hand,  it  operated  as  a  bounty  to  the 
exporter,  inasmuch  as  he  produced  his  goods  in 
India  for  rupees  and  sold  them  abroad,  London  for 
example,  for  gold,  which  when  brought  back  to 
India  exchanged  for  more  than  its  face  value  in 
rupees.  Moreover,  the  fluctuations  of  the  exchange, 
growing  out  of  the  varying  value  of  silver,  en- 
hanced the  risks  and  uncertainty  of  trade.  The 
greater  unsteadiness  of  prices  which  resulted  was 
harmful  both  to  merchants  and  the  public  at  large. 
This  condition,  however,  was  not,  of  course,  a  pe- 
culiarly Indian  problem.  It  applies  to-day  to  prac- 
tically all  countries,  on  account  of  the  abnormal 
state  of  the  exchanges  the  world  over. 

The  position  became  so  intolerable  that  in  1893 
the  Indian  Government  took  the  heroic  step  of 
closing  the  mints  to  the  free  coinage  of  silver.  No 
longer  did  the  gold  value  of  the  rupee  fluctuate 
with  the  gold  value  of  silver  bullion.  By  divorcing 
the  value  of  the  rupee  from  the  value  of  the  metal 
contained  in  it,  and  by  regulating  the  supply  of 
coined  rupees,  it  was  possible  to  bring  to  an  end 
fluctuations  in  the  excliange  value  of  that  coin.  By 
1899  the  Government  had  succeeded  in  raising  the 
gold  value  of  the  rupee  to  Is.  4fZ.  at  which  point  it 
remained  substantially  without  variation  until  1917. 

Before  turning  to  a  consideration  of  the  means 


176        INTERNATIONAL  TRADE  BALANCE 

employed  in  securing  this  stabilization  of  the  ex- 
change, it  may  be  well  to  summarize  the  main  fea- 
tures of  the  Indian  currency  system,  at  the  out- 
break of  the  war.^  The  currency  of  the  country 
consisted  of  British  gold  coins,  silver  rupees,  sub- 
sidiary coins  of  silver,  nickel,  and  bronze,  and  cur- 
rency notes.  The  British  sovereign  and  half  sov- 
ereign were  full  legal  tender  for  15  and  7^2  rupees 
respectively.  The  Government  undertook,  under 
authority  of  a  Notification  proclaimed  in  1893,  to 
issue  rupees  to  the  public  in  exchange  for  sover- 
eigns and  half-sovereigns  at  the  rate  mentioned 
above,  the  rate  working  out  at  Is.  4d.  per  rupee.  On 
the  other  hand,  there  was  no  legal  enactment  com- 
pelling the  Government  to  redeem  rupees  with  gold. 
Yet,  as  a  matter  of  administrative  practice,  the 
Government  ordinarily  issued  sovereigns  for  rupees 
or  notes  in  response  to  a  demand  from  the  public. 
At  times,  however,  the  practice  was  suspended. 
The  rupee  and  the  half-rupee,  also  full  legal  tender, 
were  the  principal  medium  of  exchange.  Currency 
notes  of  denominations  of  Rs.  5  and  upwards,  also 
circulated  and  likewise  were  full  legal  tender.  On 
presentation  at  the  Currency  Offices  they  were  con- 
vertible in  coin. 

^  In  the  preparation  of  this  summary  and  of  much  that  follows 
the  writer  has  drawn  extensively  upon  the  following  works: 

Keynes,  "Indian  Currency  and  Finance."  Report  of  Committee 
on  Indian  Exchange  and  Currency  (Cmd.  527),  1920.  Mitchell, 
"The  High  Price  of  Silver"  and  "Silver  and  the  Indian  Rupee" 
in  the  Journal  of  the  Canadian  Bankers'  Association,  Jan.,  1920, 
April,  1920,  respectively. 


THE  INDIAN  TRADE  BALANCE  177 

As  a  result  of  India's  favorable  trade  balance, 
there  was  normally  existent  abroad  a  steady  de- 
mand for  remittance  to  that  country.  This  demand 
was  met  in  part  by  the  importation  of  bullion  and 
specie,  which  was  unrestricted,  and  in  part  by  the 
sale,  in  London,  by  the  Secretary  of  State  in  Coun- 
cil of  drafts  on  the  Government  of  India.  "The 
sale  of  these  drafts,  generally  known  as  Council 
Drafts,  was  primarily  intended  to  provide  funds 
for  meeting  expenditure  on  behalf  of  the  Govern- 
ment of  India  in  the  United  Kingdom."  The  effect 
was  to  release  currency  (metallic  rupees  or  notes 
or,  exceptionally,  gold)  in  India  against  payment 
in  London  of  sterling.  The  sales  were  often  ex- 
tended, in  response  to  the  needs  of  trade,  to  pro- 
vide additional  currency.  While  the  same  re- 
sult would  have  followed  from  the  shipment  of  gold 
to  India  and  its  tender  to  the  Government  in  ex- 
change for  rupees,  the  acceptance  in  London  of 
sterling  (equivalent  to  gold  before  the  war)  was 
convenient  for  both  the  Government  and  the  pur- 
chasers of  the  Council  Drafts. 

"Remittance  by  means  of  what  are  termed  Coun- 
cil Bills  is  a  feature  peculiar  to  the  Indian  sys- 
tem," Mr.  J.  M.  Keynes  has  declared,  and  it  has  no 
parallel  elsewhere.^  "It  arises,"  he  adds,  "partly 
from  the  historical  circumstance  that  the  Govern- 
ment of  India  is  the  successor  of  a  trading  com- 
pany, partly  from  the  necessity  under  which  the 
Government  lies  of  making  very  large  annual  re- 

*  Keynes,  "Indian  Currency  and  Finance,"  p.  102. 


178        INTERNATIONAL  TRADE  BALANCE 

mittances  to  England."  These  large  payments 
which  the  Indian  Government  must  annually  make 
in  England,  for  interest  on  debt,  pensions,  govern- 
ment stores,  etc.,  are  remitted  to  England  by  sell- 
ing for  sterling  in  London  bills  which  can  be  cashed 
in  rupees  in  Calcutta.  By  this  means  the  Bank  of 
England  balance  to  the  credit  of  the  Secretary  of 
State  for  India  is  augmented  by  an  amount  cor- 
responding to  that  paid  out  in  Calcutta  in  rupees 
by  the  Government  of  India  upon  the  presentation 
of  the  bills. 

The  amount  of  the  Council  Drafts  offered  for  sale 
each  week  in  London  was  governed  not  only  by  the 
requirements  of  the  Secretary  of  State  for  India, 
but  also  by  the  current  demands  for  remittance  to 
India.  It  was,  however,  subject  to  the  financial 
ability  of  the  Indian  Government  to  meet  the  need. 
Although  the  price  received  for  the  Council  Drafts 
varied  from  time  to  time  in  response  to  variations 
in  trade  demand,  it  fluctuated  very  slightly  only. 
The  reason,  in  part,  lay  in  the  readiness  of  the 
Secretary  of  State  to  sell  drafts  without  limit  of 
amount  at  Is.  4l^d.  per  rupee,  which  corresponded 
to  the  theoretical  gold  export  point.  Naturally 
the  price  never  exceeded  this  figure.  He  also  main- 
tained the  practice  of  not  selling  the  drafts  below 
Is.  3  29/32cZ.  per  rupee.  If,  however,  owing  to  a 
change  in  the  normal  demands  of  trade,  a  tendency 
showed  itself  for  the  exchange  value  of  the  rupee 
to  fall  below  this  figure,  and  if  the  tendency  per- 
sisted, the  situation  was  met  by  the  sale  of  the 


THE  INDIAN  TRADE  BALANCE  179 

so-called  Reverse  Councils,  at  Is.  3  29/32d.  per 
rupee,  bills,  that  is  to  say,  sold  in  India  and  pay- 
able in  London  in  sterling. 

The  effect  of  these  arrangements  was  to  secure 
the  stabilization  of  exchange  yevj  near  to  the  ratio 
of  15  rupees  to  the  £.  In  practice,  the  outside  lim- 
its of  variation  of  the  sterling  value  of  the  rupee 
were  Is.  41/8^  and  Is.  3  29/32d.  The  fluctuations 
which  actually  occurred  were  similar  to  those  that 
normally  appear  in  the  exchange  between  gold 
standard  countries,  fluctuations  limited  by  the  cost 
of  transporting  gold  in  the  adjustment  of  the  bal- 
ance of  indebtedness.  The  effective  maintenance  of 
this  fixed  relation  between  the  local  currency  (ru- 
pees) and  the  international  currency  (gold)  de- 
pended clearly  enough  upon  the  action  of  the 
Secretary  of  State  for  India  in  London  in  giving 
rupee  exchange  in  return  for  gold,  and  of  the  Gov- 
ernment of  India  in  Calcutta  in  giving  sterling  ex- 
change in  return  for  nipee  currency.  The  sta- 
bility of  the  system  depended  also  in  large  part 
upon  the  maintenance  of  an  adequate  reserve  fund 
to  support  the  exchange  transactions.  Obviously 
it  was  necessary  to  have  on  hand  a  sufficient  supply 
of  coined  rupees  in  order,  at  all  times,  to  meet  the 
demand  for  exchange  of  international  currency  for 
local  currency;  and  sufficient  liquid  resources  in 
sterling  to  meet  the  reverse  demand  for  an  ex- 
change of  local  currency  into  gold.  Two  kinds  of 
reserves  were  therefore  necessary,  one  for  each  pur- 
pose.   Of  the  total  reserve  fund,  part  was  placed 


180        INTERNATIONAL  TRADE  BALANCE 

in  London  and  the  remainder  in  the  financial  center 
of  India.  The  precise  composition  and  volume  of 
the  fund  varied  from  time  to  time  in  response  to  the 
varying  obligations  of  the  Government  and  require- 
ments of  trade.  It  consisted,  generally  speaking,  of 
gold,  of  money  at  short  notice,  and  sterling  securi- 
ties.    Rupee  reserves  are  also  maintained  in  India. 

In  the  adjustment  of  India's  trade  balance  the 
part  played  by  the  precious  metals  prior  to  the  war 
was  only  slightly  less  important  than  that  of  Coun- 
cil Drafts.  During  the  five  pre-war  years  1910-14, 
for  example,  the  total  excess  of  India's  exports  over 
imports  of  commodities  amounted  to  261  millions 
sterling. 

This  was  paid  for  in  a  twofold  fashion.  Funds 
amounting  to  138  millions  were  imported,  repre- 
senting net  sales  of  Council  Drafts  (i.  e.,  Council 
Drafts  less  Reverse  Councils).^  There  was  a  fur- 
ther importation  of  funds  in  the  form  of  net  im- 
ports of  treasure  on  private  account,  amounting  to 
120  millions  sterling,  of  which  80  per  cent  was  gold. 
The  war  at  once  had  the  effect  of  dislocating  this 
normal  mechanism  of  exchange.  During  the  fol- 
lowing five  years,  ended  in  March,  1919,  the  excess 
of  merchandise  exports,  amounting  to  254  millions 
sterling,  was  liquidated  by  the  import  of  Council 
Drafts,  to  the  extent  of  100  millions,  and  by  a 
much  reduced  import  of  treasure,  amounting  to  36 
millions.    The  lessened  supply  of  treasure  imported 

^  Report    of    Committee    on    Indian    Exchange    and    Currency 
(Cmd.  527),  p.  4. 


THE  INDIAN  TRADE  BALANCE  181 

naturally  placed  a  heavy  burden  on  the  government 
rupee  balances  in  India. 

The  outbreak  of  war  gave  rise  in  India,  as  else- 
where, to  a  grave  situation.  Exchange  became 
seriously  affected,  savings  bank  deposits  were  with- 
drawn, a  great  demand  arose  for  the  encashment 
of  currency  notes,  and  a  run  occurred  on  the  In- 
dian gold  supplies.  Although  these  disquieting 
circumstances  lasted  but  a  short  time,  and  public 
confidence  was  gradually  restored,  the  exchange 
situation  continued  to  remain  a  source  of  anxiety, 
if  not  perplexity,  to  the  Government. 

During  the  early  months  of  the  war  the  trade 
of  India  was  adversely  affected.  Imports  and  ex- 
ports alike  declined  owing,  among  other  causes,  to 
the  universal  confusion  incident  to  the  outbreak  of 
hostilities,  to  the  lack  of  cargo  space,  the  presence 
of  the  Emden  in  Indian  waters,  and  the  abrupt  dis- 
appearance of  Germany  as  an  important  buyer  of 
Indian  goods.  Before  long,  however,  the  demand 
for  Indian  products  began  to  increase  rapidly  be- 
cause of  the  expanding  needs  of  the  belligerent 
countries  in  Europe.  The  excess  of  merchandise 
exports,  amounting  in  1914-15  to  only  16  millions 
sterling,  had  grown  to  more  than  60  millions  by 
1917-18.  These  favorable  balances  had  to  be  paid 
for,  and  it  was  necessary  that  they  be  paid  in  silver, 
inasmuch  as  England  and  many  other  countries 
were  unwilling  to  part  with  their  gold.  Negligible 
quantities  only  of  gold  were  obtainable,  owing  to 
the  restrictions  imposed  by  these  nations  upon  its 


182       INTERNATIONAL  TRADE  BALANCE 

export,  and  silver,  therefore,  was  the  only  alter- 
native means  of  payment.  But  to  secure  silver  the 
Indian  Government  was  obliged  to  bid  a  higher  and 
higher  price.  The  silver  rupee,  the  immemorial 
medium  of  exchange  of  India,  was  the  cash  pay- 
ment desired  by  the  Indian  producer  in  return 
for  his  goods.  The  ancient  practice  of  hoard- 
ing was  given  an  impetus  at  the  time,  as  a 
result  of  a  simultaneous  expansion  in  exports  and 
decline  in  imports.  The  surplus  funds  were 
hoarded  away.  The  natural  instinct  to  do  so  was 
doubtless  stimulated  by  the  many  rumors  at  the 
time  of  political  instability  and  military  invasions. 
At  all  events,  the  enormous  flood  of  silver  coin 
turned  out  by  the  Indian  mints  disappeared,  as  it 
were,  down  a  bottomless  pit.  Even  before  the  war 
India  normally  absorbed  a  large  part  of  the  world's 
output  of  silver,  taking  on  the  average  about  25 
per  cent  of  it.  In  1917-18  she  took  42  per  cent, 
while  during  the  fiscal  year  which  followed  she 
absorbed  actually  122  per  cent  of  the  world^s  pro- 
duction for  the  calendar  year  1918. 

In  its  effort  to  meet  the  extraordinary  demand 
for  silver  for  coinage  purposes,  the  Government  of 
India,  between  April,  1916,  and  March,  1919,  pur- 
chased, in  the  market,  over  300,000,000  standard 
ounces  of  silver  in  addition  to  200,000,000  fine 
ounces  secured  under  the  terms  of  the  Pittman 
Act.^    For  the  purpose  of  comparison  this  may  be 

^Report  of  Committee  on  Indian  Exchange  and  Currency  (Cmd. 
527),  p.  8. 


THE  INDIAN  TRADE  BALANCE         183 

contrasted  with  the  180,000,000  standard  ounces 
purchased  during  an  equal  period  of  time,  April, 
1904,  to  March,  1907,  during  which  the  Indian  de- 
mand was,  for  normal  times,  particularly  heavy 
and  continuous. 

After  the  outbreak  of  the  war  the  demand  for 
silver  elsewhere  than  in  India  was  also  increased 
through  the  necessity  of  providing  coins  for  pay- 
ment of  troops,  operating  especially  in  Mesopo- 
tamia, Egypt,  and  elsewhere  where  Indian  regi- 
ments were  largely  engaged.  Moreover,  China,  also 
a  silver-using  country,  was  subject  to  an  enhanced 
demand  somewhat  similar  to  that  of  India.  The 
general  increase  in  the  world  demand  for  silver 
coincided  with  a  notable  decline  in  the  world's  out- 
put of  that  metal. 

As  a  result  of  the  abnormally  large  purchases  of 
silver  by  the  Indian  Government  and  the  increased 
demand  from  other  quarters,  taken  in  conjunction 
with  the  decrease  in  the  supplies,  the  price  of  the 
metal  naturally  reacted  sharply.  Whereas  the 
average  price  of  silver  in  the  London  market  dur- 
ing the  last  pre-war  year  was  27  9/lQd.  per  stand- 
ard ounce,  it  had  exceeded  43d.  by  August,  1917, 
and  by  December,  1919,  it  reached  78%^-  The 
peak  was  attained  in  February,  1920,  at  a  price  of 
89i/^(?.  From  that  point  an  abrupt  decline  oc- 
curred, the  price  on  June  13,  1921,  being  3534d. 

With  the  violent  increase  in  the  price  of  silver, 
the  price  of  the  rupee  in  terms  of  gold  was  affected. 
This  in  turn  affected  the  exchange  between  India 


184       INTERNATIONAL  TRADE  BALANCE 

and  London.  The  old  ratio  of  exchange  between 
the  rupee  and  the  pound  sterling,  established  in 
1893,  of  15  rupees  to  the  £,  on  which  basis  the  rupee 
was  worth  Is.  4:d.,  was  successfully  maintained  by 
the  Indian  Government  so  long  as  the  fluctuations 
in  the  market  price  of  silver  were  not  excessive. 
Through  the  use  of  Council  Drafts  and  Reverse 
Councils  the  Government  succeeding  in  "pegging" 
the  rupee  for  many  years  at  Is.  Ad.  As  soon,  how- 
ever, as  the  price  of  silver  increased  to  a  point  at 
which  the  bullion  value  of  the  rupee  exceeded  Is. 
4:d.,  the  continued  sale  of  Council  Drafts  at  the  old 
rate  was  impossible,  except  at  a  loss  to  the  Gov- 
ernment. There  was  also  the  danger  that  if  the 
rupee  were  undervalued,  in  the  official  ratio  of  ex- 
change, it  would  tend  to  disappear  from  circulation 
through  exportation  or  melting. 

As  a  result  it  became  necessary  to  raise  the  price 
of  the  exchange.  The  first  of  a  series  of  such 
changes  took  place  on  August  28,  1917,  when  the 
price  of  the  rupee  in  Council  Drafts  was  raised  to 
Is.  5d.  Shortly  afterwards  the  Government  of 
India  announced  that  thereafter  Council  Drafts 
would  be  sold  at  a  price  based  roughly  on  the  price 
at  which  silver  could  be  purchased.  With  the  con- 
tinued increase  in  the  price  of  silver  the  rate  at 
whicli  Council  Drafts  were  sold  was  successively 
raised  to  Is.  Qd.  in  April  1918,  to  Is.  Sd.  in  May 
1919,  to  Is.  lOd.  on  August  12,  1919,  to  2s.  on  Sep- 
temper  15,  1919,  to  2s.  2d.  on  November  22,  1919, 
and  to  2s.  4(Z.  on  December  12,  1919. 


THE  INDIAN  TRADE  BALANCE    ;      185 

It  was  at  this  juncture,  January,  1920,  that  a 
report,  after  prolonged  investigations,  was  issued 
by  a  Royal  Commission  recommending  that  a  new 
ratio  of  exchange  be  established  at  10  rupees  to  the 
pound,  making  the  rupee  worth  2  shillings.  The 
new  rate  was  officially  proclaimed  in  April,  1920. 
By  September  of  that  year  the  difficulty  of  main- 
taining it  was  so  great  that  it  was  abandoned,  the 
attempt  having  cost  the  Indian  Government  over 
£50,000,000.1  Tijyg  Qj^  September  29,  1920,  when 
the  rupee  was  nominally,  or  officially,  worth  2s., 
its  market  value  was  Is.  5i/2(Z.  A  natural  result 
of  the  effort  to  enforce  the  recommendations  of  the 
Commission  was  speculation  in  exchange.  Gener- 
ally, the  market  rate  was  several  pence  below  the 
government  rate  for  Reverse  Councils.  As  a  conse- 
quence, there  was  a  rush  to  purchase  these  bills  of 
exchange  with  rupees  obtainable  in  the  market  at 
a  price  below  2s.  Eventually,  the  Government 
abandoned  its  attempt  to  stabilize  exchange,  and 
left  the  market  to  make  its  own  rate.  The  rate  soon 
steadied  at  about  Is.  Id.,  where  it  substantially  re- 
mained during  the  last  months  of  the  year.  The 
general  downward  tendency  continued,  however, 
and  on  May  23,  1921,  the  rupee  had  fallen  to  Is. 

At  the  close  of  1920  the  situation  in  India,  as  de- 
scribed by  The  Times,  was  marked  by  commercial 
embarrassment. 

^London  Times,  Annual  Financial  Review,  January  28,  1921. 


186      INTERNATIONAL  TRADE  BALANCE 

"Exporters,"  it  declared,  "find  little  or  no  mar- 
ket for  the  produce  available.  For  many  months 
an  unabsorbed  surplus  of  a  million  bales  of  cotton 
hung  heavily  over  the  Western  markets.  Jutes, 
hides,  skins,  and  tea  are  in  poor  demand.  Im- 
porters are  still  harder  hit.  The  Lancashire  tex- 
tiles which  they  ordered  in  such  immense  quanti- 
ties at  2s.  6(7..  for  the  rupee,  are  coming  forward 
for  payment  with  the  rupee  at  Is.  Id.  or  less.  Very 
heavy  losses  have  been  incurred  by  importers  and 
dealers;  goods  cannot  be  cleared,  and  some  of  the 
most  substantial  houses  have  found  themselves 
seriously  embarrassed." 

This  condition  of  commercial  depression,  how- 
ever, was  of  course  not  to  be  attributed  entirely  to 
the  fluctuations  in  the  price  of  silver  and  the  ac- 
companying dislocation  of  exchange.  In  common 
with  other  countries,  India  was  bound,  sooner  or 
later,  to  undergo  a  period  of  deflation.  And  since 
trade  does  not  flourish  when  prices  are  declining,  it 
was  inevitable  that  business  stagnation,  in  greater 
or  less  degree,  should  result  the  world  over,  India 
included,  with  the  appearance  of  deflation.  As  the 
downward  course  of  prices  is  checked,  trade,  it  may 
be  expected,  will  soon  react.  It  will  doubtless 
gradually  be  restored  to  a  wholesome  and  stable 
condition,  attended  by  a  return  to  normal  exchange 
relations  between  India  and  the  outside  world. 


CHAPTER  VI 

THE    BALANCES    OF    TRADE    OF    AUSTRALIA,    NEW 
ZEALAND   AND    SOUTH   AFRICA 

Australia 

Attention  was  called  in  the  preceding  chapter 
to  a  contrast  between  certain  features  obtaining 
in  the  trade  balances  of  Canada  and  India  during 
the  twenty  years  prior  to  the  war.  In  Australia, 
a  situation  prevailed  which  was  unlike  that  in 
either  of  the  other  two.  During  the  same  two 
decades,  the  excess  of  exports,  which  in  1892  began 
definitely  to  mark  the  trade  balance  of  the  Com- 
monwealth, increased  for  a  time,  but  later  declined, 
reaching  almost  the  vanishing  point  in  1912.  In 
1913  there  was  a  slight  import  balance.  The  effect 
of  the  war  during  the  early  stages  was  evidently 
to  accentuate  this  movement,  for  a  considerable 
excess  of  imports  marked  Australian  trade  during 
each  of  the  fiscal  years  1914-15  and  1915-16.^ 
During  the  following  year,  however,  a  further 
transition  abruptly  appeared.    This  new  excess  of 

^  The  trade  year  in  the  Commonwealth  of  Australia  was  altered 
in  1914.  Before  that  time  trade  statistics  were  returned  for 
calendar  years.  Since  that  date  the  trade  year  has  closed  on  June 
30  of  each  year. 

187 


188   INTERNATIONAL  TRADE  BALANCE 

exports   attained   record  proportions   during   the 
year  which  closed  on  June  30,  1920. 

The  general  features  of  the  visible  balance  of 
trade  of  Australia  are  revealed  in  the  statement 
which  follows. 

Balance  of  Trade ^ 
(Merchandise,  bullion,  and   specie) 


5-Yem- 

Periods 

Annual 

Average 

Recorded  Excess  of: — 

Imports 

Exports 

1867- 

-1871     .. 
-1876     . . 

£  Million 

LO 
9.0 
6.0 

'2.6 

£  Million 
2.2 

1872- 

1.2 

1877- 

-1881     .. 

1882- 

-1886     . . 
-1891     .. 
-1896     ,. 

1887- 

1892- 

7.4- 

1897- 

-1901     .. 
-1906     .  . 

8.2 

1902- 

15.6 

1907- 

-1911     .. 
-1915-16 
-17-1919- 

15.2 

1912- 
1916- 

(41/0 
-20   (4 

years)    

years)    

25.6 

^Australian  Official  Year  Book,  No.  13,  p.  581. 

It  would  appear  from  the  foregoing  that  during 
the  ten  years  following  1902  there  must  normally 
have  been  a  balance  of  invisible  items  against  Aus- 
tralia. The  excess  of  merchandise  exports,  which 
between  1902  and  1911  amounted  in  value  to  fifteen 
million  pounds  a  year,  may  be  looked  upon  as  the 
offsetting  factor  counterbalancing  this  excess  of 
invisible  debits. 

As  would  be  expected,  during  the  earlier  years 
of  her  career,  Australia  normally  imported  goods  to 


AUSTRALIA,  NEW  ZEALAND,  SOUTH  AFRICA  189 

a  greater  value  than  she  exported.  From  1826,  the 
earliest  date  for  which  records  are  available,  i  \g  ^^ 
onwards,  for  forty  years  the  balance  of  trade  was 
marked  by  an  excess  of  imports.  Through  the  dis- 
covery of  gold  in  the  fifties  an  enormous  increase 
took  place  in  both  imports  and  exports.  A  reac- 
tion, however,  appeared  during  the  sixties,  as  a 
result  of  a  succession  of  indifferent  crop  seasons  in 
New  South  Wales  and  a  decline  of  alluvial  gold 
mining  in  Victoria.  Subject  to  these  circum- 
stances the  labor  market  became  congested,  and 
there  arose  as  a  consequence  an  agitation  for  a 
protective  tariff  to  provide  employment  in  manu- 
factures. In  the  year  1866  the  colony  of  Victoria 
adopted  an  act  providing  protection.  It  would 
appear  from  the  trade  statistics  of  the  period  that 
the  tariff  of  1866  fulfilled  one  at  least  of  the  ex- 
pectations of  its  framers,  in  that  it  contributed 
toward  reducing  the  volume  of  foreign  imports. 
For  example,  although  imports  during  the  five 
years  1862-66  had  an  average  annual  value  of 
nearly  £21,000,000,  it  was  seven  years  after  the  ^ 
passing  of  the  act  before  imports  again  reached  a 
^' total  of  £20,000,000.  The  balance  of  trade  was 
marked  by  an  excess  of  exports  during  the  period 
^1367-75^ From  that  time,  however,  down  toI1892^ 
\T  save  in  a  single  year,  there  was  an  excess  on  the 
(  side  of  imports.  As  mentioned  above,  a  further  ^ 
transition  occurred  in  1892,  the  new  export  balance*^  ^+) 
continuing  until  1912,  and  reappearing  in  1916-17.  ) 
In  short,  the  Australian  balance  of  trade  prior 


190   INTERNATIONAL  TRADE  BALANCE 

to  1892  was  on  the  side  of  imports,  save  for  certain 
exceptional  years  in  which  temporary  dislocations 
of  trade  intervened.  And  from  that  date  down  to 
nearly  the  time  of  the  war  an  export  balance  pre- 
vailed. The  excess  of  imports  in  the  earlier  period 
represents  the  introduction  of  foreign  capital  for 
government  purposes,  as  well  as  for  investment  in 
private  undertakings.  In  this  respect  the  expe- 
rience of  Australia  is  but  a  counterpart  of  that  of 
the  United  States  down  to  1873,  and  of  Canada 
prior  to  1914.  The  Australian  excess  of  exports  in 
the  later  period  represents  mainly  the  interest  and 
profit  on  the  earlier  investments,  repayment  of 
loans  to  foreign  security  holders,  and  also  freight 
charges  on  overseas  trade,  which  is  mainly  carried 
by  ships  of  the  United  Kingdom  and  foreign  coun- 
tries. Inasmuch  as  the  introduction  of  new  capi- 
tal, the  interest  payments  on  earlier  investments, 
and  other  payments  on  account  of  shipping  and 
other  services  are  constantly  operating  in  opposite 
directions  at  the  same  time,  it  follows  that  in  the 
statistics  of  trade  it  is  the  balance  only  of  these 
transactions  which  is  reflected  in  the  excess  of 
imports  or  exports. 

While,  as  is  well  known,  the  capital-borrowing 
countries  of  the  world  normally  have  an  excess  of 
merchandise  exports  over  imports,  after  the  earlier 
stages  of  borrowing  are  passed,  we  nevertheless 
may  count  Australia  a  borrowing  nation,  notwith- 
standing the  abrupt  and  rather  unexpected  disap- 
pearance in  1913  of  the  customary  export  balance. 


AUSTRALIA,  NEW  ZEALAND,  SOUTH  AFRICA  191 


The  excess  of  exports  from  1892  onward  came  to 
b^  looked  upon  as  the  normal  condition. 

The  change  in  the  ratio  of  exports  to  imports, 
subsequent  to  1912,  was  due  mainly,  in  the  opinion 
of  Mr.  G.  H.  Knibbs,  the  Commonwealth  Statis- 
ticiaL,  to  new  loans  raised  in  London  by  the  gov- 
ernments of  the  various  states  of  the  country. 
"The  proceeds  of  these  loans,  of  course,  swell  the 
import  returns,  but,  as  no  immediate  payment 
beyond  an  installment  of  interest  has  to  be  made 
in  return,  the  export  figures  are  affected  to  a  very 
minor  degree,  until  such  time  as  the  principal  of 
the  debt  is  repaid."  ^ 

That  the  various  state  governments  greatly  in- 
creased their  foreign  indebtedness  about  and  subse- 
quent to  1912  will  be  apparent  at  once  from  the 
following  statement,  which  shows  that  portion  of 
their  aggregate  public  debt  payable  in  London.^ 


Fiscal   Year,   ending   June  30 


Amount 


1906 
1907 
1908 
1909 
1910 
1911 
1912 
1913 
1914 


£1,000 

190,887 

185,579 

183,321 

189,410 

191,972 

189,067 

192,190 

204,395 

224,061 


We  note  from  the  above  table  that,  whereas  the 
average  of  the  London  indebtedness  of  the  several 

^  Anstralian  Official  Year  Booh,  No.  10,  p.  539. 
*  "Summary    of    Australian    Financial    Statistics,    1906-1915," 
p.  21. 


192       INTERNATIONAL  TRADE  BALANCE  / 

states  was  approximately  £188,000,000  during  thd 
years  1906  to  1911  inclusive,  it  had  increased  io 
£207,000,000  for  the  period  1912  to  1914.  Or, 
stating  the  case  in  still  another  form,  it  is  apparent 
that  while  the  London  indebtedness  of  the  spates 
was  increased  by  £33,000,000  during  the  eight  years 
under  consideration,  £31,000,000  of  this  was  in- 
curred between  1912  and  1914.  This  indebtedness, 
be  it  noted,  was  wholly  independent  of  the  war,  the 
calculations  not  proceeding  beyond  June.  1914. 

The  change  in  the  ratio  between  exports  and  im- 
ports, subsequent  to  1912,  was  also  affected  to  some 
extent  by  the  introduction  of  capital  incident  to  a 
sudden  and  large  increase  in  the  number  of  immi- 
grants. It  will  be  recalled  that  in  the  study  of  the 
Canadian  balance  of  trade  the  capital  carried  into 
the  country  by  immigrants  formed  an  important 
invisible  item.  Likewise  in  the  case  of  Australia 
the  ebb  and  flow  of  the  immigration  tides  cannot 
fail  to  exercise  a  more  or  less  important  influence. 

In  attempting  to  construct  a  balance  sheet  of  the 
international  debits  and  credits  of  the  Common- 
wealth, attention  will  be  directed  first  to  the  mer- 
chandise or  visible  exports  and  imports.  These 
are  tabulated  in  the  statement,  on  page  193,  for  the 
three  years  1911-13. 

For  the  three  years  under  consideration,  there- 
fore, the  excess  of  exports  had  an  average  annual 
value  of  £4,000,000.  It  is  natural  to  expect  to  find 
a  roughly  corresponding  excess  of  invisible  debits. 

Prominent  among  the  invisible  items  are   the 


AUSTRALIA,  NEW  ZEALAND,  SOUTH  AFRICA  193 

OvEESEA  Trade  of  Australia  ^ 
(Merchandise,  bullion,  and  specie) 


1911 
£1,000 

1912 
£1,000 

1913 
£1,000 

Exports    

Imports    

79,482 
66,968 

79,096 
78,159 

78,572 
79,749 

Net  excess  of  Ex- 
ports   

12,514 

937 

— 1,177    (excess  of 
imports) 

^Australian  Official  Year  Book,  No.  9,  p.  543. 

importation  into  Australia  of  foreign  capital  and 
the  payment  of  interest  and  dividends  to  the  own- 
ers of  such  capital.  In  the  statement  below  there 
is  presented  the  total  of  the  public  debts  of  the 
various  Australian  Governments  payable  in  Lon- 
don, during  a  period  of  years. 

Public  Indebtedness  of  Australia 
Payable  in  London  ^ 


Year  ended  June  30 

Public  Debt  of  the 

Commonwealth 

Oovernment 

Combined  Debts  of 

the  Several  State 

Oovernments 

1910    

£1,000 

3,815 
3,815 
3,646 
3,510 

£1,000 
191,972 

1911    

189,067 

1912    

192,190 

1913    

204,395 

1914    

224,06T 

'  "Summary  of  Australian  Financial  Statistics,  1906-15,"  pp.  15,  21. 

It  is  at  once  necessary  to  take  account  of  the  fact 
that  whereas  the  trade  figures  for  exports  and  im- 
ports were  recorded  for  calendar  years,  prior  to 
1914,  the  financial  statistics,  such  as  those  above, 
are  given  for  fiscal  years,  ending  June  30th.    As  a 


194   INTERNATIONAL  TRADE  BALANCE 

consequence,  allowance  must  be  made  for  this  con- 
dition. The  estimate  of  public  indebtedness  will  be 
computed  on  the  basis  of  calendar  years. 

To  this  end,  therefore,  it  may  be  assumed  that 
the  total  at  the  opening  of  the  calendar  year  1911 
stood  approximately  midway  between  the  totals 
recorded  above  for  June  30th  of  the  years  1910  and 
1911.  Similarly  the  figure  at  the  close  of  the  cal- 
endar year  1913  may  be  assumed  roughly  to  have 
been  the  average  of  the  totals  for  the  fiscal  years 
1913  and  1914.  Proceeding  on  this  assumption,  the 
London  indebtedness  of  the  various  State  Govern- 
ments may  be  estimated  to  have  averaged  during 
the  three-year  period  in  question  about  £200,000,- 
000.  The  London  indebtedness  of  the  Common- 
wealth Government  averaged  nearly  £4,000,000. 
Loans,  moreover,  were  floated  abroad  by  municipal 
authorities,  although  generally  not  in  large 
amounts.  The  total  of  municipal  loans  current  at 
the  end  of  the  year  1913  amounted  to  £16,000,000.^ 
Of  this  amount,  one  and  a  quarter  million  pounds 
had  been  secured  from  the  Federal  Government  and 
approximately  thirteen  million  pounds  had  been 
raised  within  the  Commonwealth.  The  balance, 
therefore,  of  nearly  £2,000,000  ma}^  be  looked  upon 
as  the  measure  of  foreign  indebtedness  of  the  local 
governments.  By  combining  this  figure  with  that 
representing  the  London  indebtedness  of  the  Fed- 
eral and  State  Governments,  we  reach  the  conclu- 
sion that  for  the  period  in  question  the  aggregate 

^  Ibid.,  p.  30.     Also  Australian  Official  Year  Book,  No.  8,  p.  898. 


AUSTRALIA,  NEW  ZEALAND,  SOUTH  AFRICA  195 

average  foreign  indebtedness  of  the  various  govern- 
ing bodies  in  Australia  was  about  £206,000,000. 

We  are  in  a  position  now  to  estimate  both  the 
annual  public  charges  payable  to  foreign  lenders 
in  the  form  of  interest  and  the  contraction  of  new 
foreign  loans  on  government  account.  It  will  be 
noted  from  the  table  above  that  the  London  indebt- 
edness of  the  Commonwealth  Government  was 
slightly  reduced  between  1911  and  1913,  whereas 
for  the  several  states  the  London  indebtedness  was 
increased  about  £24,000,000.  For  the  Common- 
wealth and  State  Governments,  in  the  aggregate, 
therefore,  the  increase  was  approximately  £24,- 
000,000.  As  an  average  annual  increase  for  the 
period,  1911-13,  this  amounted  to  £8,000,000.  In- 
asmuch as  the  net  change  in  the  foreign  indebted- 
ness of  the  municipal  authorities  during  that  period 
was  of  negligible  proportions,  we  may  quite  fairly 
accept  the  figure  £8,000,000  as  representing  the 
average  annual  volume  of  foreign  capital  flowing 
into  Australia  on  government  account. 

In  determining  the  amount  of  interest  charges 
due  to  the  foreign  owners  of  capital  thus  loaned 
on  public  account  in  Australia  we  revert  again  to 
the  figure,  £206,000,000,  which  represents  for  the 
period  in  hand  the  foreign  indebtedness  of  the 
various  governments  of  the  country.  The  average 
rate  of  interest  payable  on  the  Commonwealth 
public  debt,  in  1911-13,  was  somewhat  over  31/2 
per  cent,  whereas  for  the  State  and  Municipal 
Governments  the  average  of  the  rates  was  slightly 


196   INTERNATIONAL  TRADE  BALANCE 

under  4  per  cent.^  Proceeding  on  this  basis  we 
discover  that,  for  the  years  under  discussion,  the 
annual  interest  payments  abroad  by  the  Federal 
Government  averaged  somewhat  over  £130,000, 
while  for  the  otlier  governing  bodies  of  the  country 
tlie  foreign  interest  charges  amounted  to  about 
£8,000,000.  The  aggregate  annual  interest  pay- 
ments abroad,  therefore,  on  government  account 
averaged  slightly  more  than  £8,000,000.  If  we  now 
bring  together  this  debit  item  representing  interest 
charges  and  the  credit  item  representing  the  im- 
portation of  foreign  capital,  already  estimated  at 
£8,000,000,  we  note  at  once  an  equivalence.  On 
government  account,  therefore,  during  the  selected 
years,  Australia  was  subject  to  neither  a  net  credit 
nor  debit. 

An  important  item,  concerning  which  unfortu- 
nately there  is  a  dearth  of  official  information,  is 
that  relating  to  the  importation  of  foreign  capital 
on  private  account.  It  appears  from  the  evidence 
of  Mr.  Robert  Nash  before  the  Dominions  Royal 
Commission,  at  Sydney  in  April,  1913,  that  the 
total  of  British  capital  invested  in  Australia 
amounted  in  1912  to  £370,000,000.2  The  quantity 
of  foreign  capital  other  than  British  invested  in 
Australia  is  so  negligible  that  we  may  disregard  it. 
As  has  been  shown  above,  the  total  foreign  indebt- 
edness of  the  various  governing  bodies  in  Australia 

^"Summary  of  Australian  Financial  Statistics,  1906-1915," 
pp.  15,  23, 

*  "Dominions  Royal  Commission  Reports"   (Cd.  7171),  p.  292. 


AUSTRALIA,  NEW  ZEALAND,  SOUTH  AFRICA  197 

amounted  in  1912  to  about  £206,000,000.  There- 
fore foreign  capital  privately  invested  in  the  coun- 
try amounted  at  that  time  to  roughly  £165,000,000. 
Although  the  estimate  of  Mr.  Nash  was  later  ques- 
tioned by  Mr.  Knibbs,  the  Commonwealth  Statis- 
tician, yet,  in  the  absence  of  official  statistics  of  pri- 
vate investments,  we  may  be  justified  in  accepting 
the  foregoing  figures  as  approximately  accurate. 
Proceeding  on  this  assumption,  we  find  that  the 
average  annual  interest  charge  payable  abroad  on 
foreign  capital  invested  privately  amounted  prob- 
ably to  £8,250,000.  Inasmuch  as  it  seemed  to  be  Mr. 
Nash's  opinion  that  not  only  was  capital  on  private 
account  not  being  imported  during  the  years  im- 
mediately before  the  war  but  that  it  was  probably 
going  abroad  in  the  repayment  of  loans,  we  shall 
probably  be  safe  in  assuming  that  during  the  years 
1911-13  the  annual  importation  of  foreign  capital 
for  private  investment  did  not  average  more  than 
£200,000.  As  a  consequence,  a  net  debit,  on  ac- 
count of  interest  payments,  appears  against  Aus- 
tralia of  about  £8,000,000  a  year. 

It  has  already  been  mentioned  that  a  consid- 
erable increase  occurred  in  the  tide  of  immigration 
during  the  years  prior  to  the  war.  During  our 
selected  three-year  period  the  net  immigration,  or 
excess  of  arrivals  over  departures,  amounted  to 
236,000  persons.  This  represented  an  average  net 
increase  through  immigration  of  nearly  80,000  per 
year.  In  the  absence  of  official  information  as  to 
the  amount  of  capital  carried  into  Australia  by 


198       INTERNATIONAL  TRADE  BALANCE 

immigrants  it  will  be  necessary  to  form  an  esti- 
mate. From  the  investigations  of  the  immigration 
authorities  in  Melbourne  in  1912,  it  appears  that 
the  amount  of  funds  carried  in  by  immigrants  into 
the  state  of  Victoria  averaged  about  £9  per  head.^ 
A  study  by  the  United  States  Bureau  of  Immigra- 
tion has  led  to  the  statement  that  during  the  years 
1909-13  the  per  capita  amount  of  capital  held  by 
immigrants  arriving  in  the  United  States  from  the 
British  Isles  was  |82.^  This  figure,  be  it  noted, 
represented  only  the  money  shown  by  the  new- 
comers. If  the  usual  settlers'  effects  had  been  in- 
cluded, the  amount  doubtless  would  have  been 
much  larger.  The  American  statement  is  men- 
tioned on  account  of  its  direct  bearing  on  the  case 
in  hand,  in  view  of  the  fact  that  the  great  bulk  of 
the  immigrants  into  Australia  are  from  the  British 
Isles.  It  is,  of  course,  not  to  be  expected  that  the 
oversea  immigrant  into  the  Commonwealth  is  so 
abundantly  equipped  with  capital  as  is  the  immi- 
grant into  Canada  from  the  American  West.  Yet, 
if  we  take  into  consideration  all  who  sought  a  new 
home  in  Australia,  including  both  the  well-to-do 
and  the  impecunious  alike,  we  will  probably  not  be 
subject  to  a  wide  margin  of  error  if  we  estimate 
the  average  per  capita  holding  of  capital,  includ- 
ing both  money  and  settlers'  effects,  at  £25.  The 
net  credit,  therefore,  arising  out  of  the  introduction 
of  capital  through  the  influx  of  immigrants  may  be 

^"Dominions  Royal  Commission  Reports"   (Cd.  7171),  p.  297. 
*Thia  statement  was  contained  in  a  letter  to  the  writer. 


AUSTRALIA,  NEW  ZEALAND,  SOUTH  AFRICA  199 

estimated  at  £2,000,000  a  year  during  our  selected 
period. 

Another  invisible  item  is  tliat  of  private  remit- 
tances both  into  and  out  of  Australia.  The  value 
of  money  orders  and  postal  notes  issued  in  Aus- 
tralia during  the  years  1911-13  averaged  £10,860,- 
000  a  year.^  In  the  same  period  the  money  orders 
and  postal  notes  paid  in  Australia  had  an  average 
value  of  £10,115,000.  It  is  a  fair  presumption 
that  the  difference  between  the  two  represented  a 
balance  payable  abroad.  Thus  it  formed  a  net 
debit  annually  of  about  £145,000. 

As  has  been  the  case  with  the  United  States,  so 
with  Australia,  the  service  rendered  by  foreign 
ships  in  the  carriage  of  overseas  trade  has  consti- 
tuted a  debit  item.  A  small  part  only  of  the  for- 
eign trade  of  the  Commonwealth  has  been  carried 
in  Australian-owned  vessels.  During  the  three- 
year  period,  1911-13,  the  vessels  which  entered 
and  cleared  the  i)orts  of  the  Commonwealth  had 
a  total  tonnage  averaging  10,287,000  tons  per 
year.2  The  tonnage  of  the  Australian  ships, 
amounting  to  863,000  tons  a  year,  formed  slightly 
less  than  nine  per  cent  of  this  total.  However, 
the  shipping  charges  growing  out  of  the  transporta- 
tion of  Australian  goods  in  foreign  bottoms  are  for 
the  most  part  included  in  the  official  figures  for 

^Compiled  from  figures  in  the  Australian  Official  Year  Book, 
No.  10,  p.  701. 

'  "Summary  of  Commonwealth  Statistics  of  Transport  and  Com- 
munication, 1906-1916,"  p.  27. 


200       INTERNATIONAL  TRADE  BALANCE 

imports.  This  is  so  because  of  the  fact  that  "the 
recorded  value  of  goods  imported  from  countries 
beyond  the  Commonwealth  represents  the  amount 
on  which  the  duty  is  payable,  or  would  be  payable 
if  the  duty  were  charged  ad  valorem.  The  value 
of  goods  is  taken  to  be  ten  per  cent  in  advance  of 
the  fair  market  value  in  the  principal  markets  of 
the  country  whence  the  goods  were  exported,  the 
increase  being  intended  to  represent  roughly  the 
insurance,  freight,  and  other  charges  to  the  place 
of  landing."  ^  No  further  allowance  need  be  made, 
therefore,  on  account  of  this  debit.  But  inasmuch 
as  other  countries  are  called  upon  to  pay  the  cost 
of  transporting  the  goods  which  they  purchase 
from  the  Commonwealth,  there  is  a  small  credit 
item  growing  out  of  the  service  of  Australian  ships 
in  carrying  Australian  exports.  There  is  also  a 
minor  credit  arising  from  the  sale  in  Australian 
ports,  to  overseas  ships,  of  coal  and  other  ship 
stores,  such  articles  not  being  recorded  offtcially 
under  exports.  Taking  into  consideration  all  of 
the  various  factors  in  the  situation,  we  may  place 
to  the  account  of  Australia  on  the  score  of  shipping 
a  net  credit  of  £1,500,000  a  year  during  the  period 
in  question. 

Certain  minor  items  we  are  obliged  to  disregard, 
owing  to  the  absence  of  official  figures  on  which  to 
base  estimates,  as  for  example  the  debit  growing 
out  of  the  expenditures  abroad  of  Australian  trav- 
elers.   This  and  other  such  unrecorded  items  may 

*  Australian  Official  Year  Book^  No.  10,  p.  535. 


AUSTRALIA,  NEW  ZEALAND,  SOUTH  AFRICA  201 

be  assumed  roughly  to  have  balanced.    The  results 
may  now  be  presented  in  tabular  form. 

Appeoximate  Balance  Sheet  of  Australia 

(Figures  Represent  Annual  Averages  for  the  Period 
1911  to  1913) 

Visible  Credits  and  Debits:  £ 

Average  annual  excess  of  visible  credits    4,000,000 

Invisible  Credits  and  Debits: 

New  capital  imported,  and  interest  payments  payable 
abroad  on  government  account :  estimated  to  balance 

New  capital  imported,  and  interest  payments  payable 

abroad  on  private  account :   average  net  debit   ....   8,000,000 

Capital   carried   into   Australia  by   immigrants   and 

out  by  emigrants :  average  net  credit 2,000,000 

Payments  effected  through  money  orders  and  postal 

notes :    average  net  debit    445,000 

Payments  on  account  of  ocean  freights,  sale  of  ships' 

stores,  etc. :  average  net  credit 1,500,000 

Expenditures  abroad  by  Australians,  in  the  Common- 
wealth by  foreigners,  private  remittances,  etc. :  esti- 
mated to  balance 

Average  annual  excess  of  invisible  debits 4,945,000 

The  discrepancy  of  nearly  £1,000,000  between 
the  visible  credit  balance  and  the  invisible  debit 
balance  may  very  fairly  be  attributed  to  the  mar- 
gin of  error  admittedly  present  in  certain  of  the 
foregoing  estimates. 

It  has  been  stated  above  that  the  excess  of  ex- 
ports attained  unprecedented  proportions  during 
the  fiscal  year  ended  June  30,  1920.  Including 
merchandise,  specie,  and  bullion,  this  so-called 
favorable  balance  amounted  to  nearly  £50,000,000. 
Almost  at  once,  however,  the  position  began  to 
undergo  change.  An  extraordinary  increase  in  the 
value  of  imports  has  been  accompanied  by  an  ac- 
tual decline  in  the  value  of  exports.    As  a  conse- 


202   INTERNATIONAL  TRADE  BALANCE 

quence,  the  balance  of  trade  during  the  current 
fiscal  year,  which  will  close  June  30,  1921,  gives 
promise  of  showing  an  excess  of  imports,  which 
likewise  may  reach  record  proportions.  It  is  esti- 
mated that  this  so-called  unfavorable  balance  will 
amount  to  not  less  than  £30,000,000. 

The  principal  cause  of  this  abrupt  change  in  the 
Australian  trade  balance  is  generally  understood 
to  have  been  the  action  of  British  and  American 
manufacturers  and  exporters  in  diverting  to  Aus- 
tralia large  consignments  of  goods,  as  soon  as  they 
discovered  that  the  European,  South  American, 
and  Eastern  markets  were  largely  closed  to  them 
owing  to  adverse  exchanges.  In  part  this  en- 
hanced inflow  of  imports  represented  a  belated 
shipment  of  goods.  During  1919,  when  trade 
throughout  the  world  was  generally  brisk,  imports 
were  relatively  difficult  to  obtain.  At  that  time 
orders  by  Australian  importers  were  only  partially 
filled  by  British  and  other  overseas  firms.  Sud- 
denly, however,  with  the  trade  reaction  incident  to 
deflation  and  aggravated  exchange  difficulties  the 
world  over,  manufacturers  began  to  supply  not 
only  the  new  orders  in  full,  but  orders  as  well  that 
were  in  arrears.  An  accompanying  cause  of  the 
change  in  the  trade  balance  has  been  the  decline  in 
exports,  growing  out  of  the  demoralization  of  the 
European  wool  markets. 

In  addition  to  the  large  excess  of  imports  which 
has  so  suddenly  made  its  appearance  during  the 
current  fiscal  year,  there  are,  of  course,  the  in- 


AUSTRALIA,  NEW  ZEALAND,  SOUTH  AFRICA  203 

visible  debit  charges,  such  as  interest  and  freight, 
which  likewise  have  to  be  paid  for  abroad.  The 
result  has  been  an  exhaustion  of  the  available 
funds  held  in  London  by  most  of  the  Australian 
banks.  This  in  tura  has  led  the  banks  to  restrict 
oversea  credits,  with  the  further  result  that  im- 
porters have  been  forced  to  realize  as  best  they 
can  on  their  stocks  through  the  reduction  of  prices. 
With  the  marketing  abroad  of  Australian  wool, 
wheat,  and  other  exports,  the  position  in  London 
of  the  Australian  banks  will  become  easier. 

It  will  be  recalled  that  one  of  the  factors  which 
rendered  an  excess  of  merchandise  exports  nor- 
mally necessary  in  the  case  of  Australia  was  the 
payment  of  interest  abroad  on  foreign,  chiefly 
British,  capital.  During  the  years  prior  to  the 
war  the  annual  interest  charges  payable  in  London 
on  government  account  amounted  to  about  £8,000,- 
000.  Since  1914  the  burden  of  public  debt,  as  a 
result  of  the  war,  has  been  greatly  increased.  At 
the  present  time,  the  interest  annually  payable  on 
the  aggregate  public  debt  of  both  the  Common- 
wealth and  the  States  amount  to  £35,000,000,  of 
which  £15,000,000  is  payable  abroad,  in  London. 
This  invisible  debit  item,  of  interest  on  government 
account,  is  therefore  nearly  twice  as  large  as  for- 
merly. According]}^,  it  would  appear  that  the  need 
of  a  credit  balance  of  merchandise  exports  has  be- 
come correspondingly  greater.  With  the  return 
of  normal  conditions  of  trade  both  at  home  and 
abroad,  it  may  be  anticipated  that  the  trade  bal- 


204       INTERNATIONAL  TRADE  BALANCE 

ance  will  again  come  to  be  marked  by  an  excess 
of  exports. 

'New  Zealand 

The  economic  history  of  New  Zealand  is  in  large 
measnre  epitomized  in  the  growth  of  the  external 
trade  of  the  country.  The  expansion  of  the  foreign 
trade  since  1853,  the  earliest  date  for  which  there 
are  official  figures,  and  the  general  relation  between 
exports  and  imports  are  revealed  for  selected  years 
in  the  table  below. 

Impobts,  Exports,  axd  Total  Trade  of  New  Zealand  ^ 


"Year 

Total  Value 

Imports 

Exports 

Total  Trade 

1853     

£1,000 
597 

£1,000 
303 

£1,000 
901 

1873    

1893    

1903    

12,075 
15,896 
27,799 

6,911 

12,788 
20,976 
22,288 

8,985 
15,010 
21,770 
22,986 

1912    

42,747 

1913    

45,275 

'  ISlew  Zealand  Official  Year  Book,  1917,  p.  262. 

During  the  early  years  of  European  occupation 
the  exports  exceeded  the  imports.  This  fact  finds 
its  explanation  in  the  weaker  bargaining  power  of 
the  Maori  and  the  temporary  residence  of  the 
traders.  From  1840  on,  however,  with  the  per- 
manent settlement  of  the  colony,  there  appeared 
an  inflation  of  imports  occasioned  by  the  introduc- 
tion of  capital  by  the  colonists,  for  the  purpose  of 
land  development.  This  excess  of  imports  con- 
tinued without  interruption  till  1870,  although  on 


AUSTRALIA,  NEW  ZEALAND,  SOUTH  AFRICA  205 

a  declining  scale  during  the  latter  part  of  the 
period.  For  two  yeare  thereafter,  the  imports 
were  surpassed  by  the  exports.  This  temporally 
excess  of  exports,  however,  gave  way  in  1873  to 
an  import  balance,  the  great  increase  in  imports 
being  due  to  an  enlarged  policy  of  foreign  borrow- 
ing. The  expenditure  of  borrowed  money  brought 
on  the  land-boom,  which  led  to  a  general  increase 
of  exports  as  well.  Except  for  the  single  year  1880, 
imports  continued  thereafter  to  be  greater  than 
exports  until  1886. 

From  that  date  down  to  the  time  of  the  war  there 
was  a  continued  excess  of  exports  save  for  the  two 
years,  1908  and  1911.  This  excess  of  exports  was 
most  pronounced  between  1886  and  1895.  There- 
after the  lines  representing  these  trade  currents 
ran  almost  parallel,  as  may  be  seen  from  the  dia- 
gram on  page  206.  It  should  be  borne  in  mind,  of 
course,  that  in  this  chart,  in  which  five-year  aver- 
ages are  indicated,  the  exceptional  variations  of 
single  years  do  not  appear. 

As  we  should  naturally  expect,  the  excess  of  ex- 
ports during  the  last  thirty  years  has  sei'ved 
mainly  to  offset  such  invisible  debits  as  interest, 
profits,  and  other  charges  on  foreign  capital  in- 
vested in  New  Zealand.  There  are  other  debit 
items,  such  as  private  remittances  abroad  and 
shipping  charges,  which  would  have  the  effect  of 
swelling  the  balance  of  exports.  Among  the  in- 
visible credits  the  principal  ones  were  the  impor- 
tation of  foreign  capital  for  investment  and  the 


206       INTERNATIONAL  TRADE  BALANCE 


capital  carried  into  New  Zealand  by  immigrants. 
As  regards  some  of  these  items  there  is  an  absence 
of  official  data. 

During  the  three  years  1911-13,  there  was  an 
average  annual  excess  of  merchandise  exports,  or 
visible  credits,  amounting  to  £370,000.    Among  the 

Quinquennial  Averages  of  Values  of  Impob'^Is  and  Expoets 
OF  New  Zealand,  1853  to  1914^ 

25 1 1 1 1 1 1  '1  i  I  n  1 1 1 1 1 1 1 1 


1853       1860 


1870 


1900 


1880  1890 

YEAR 
'  'New  Zealand  Official  Tear  Book,  1916,  p.  250. 


1910   1015 


invisible  items  there  are  two  concerning  which 
there  is  ample  information.  These  are  the  annual 
interest  payments  on  public  indebtedness,  and  the 
introduction  of  new  foreign  capital  on  government 
account.  The  amount  of  interest  payable  abroad, 
chiefly  in  London  and  in  Australia,  on  the  public 
debt  of  New  Zealand  amounted  during  the  years 


AUSTRALIA,  NEW  ZEALAND,  SOUTH  AFRICA  207 

1911  to  1913  to  about  £3,000,000  a  year,  while  on 
the  foreign  indebtedness  of  the  local  governing 
bodies  it  amounted  to  about  £350,000.^  This  total 
annual  interest  charge  of  £3,300,000  on  public  ac- 
count was  more  than  offset  by  the  credit  growing 
out  of  the  importation  of  new  foreign  capital  for 
government  purposes.  The  aggregate  foreign  in- 
debtedness of  the  New  Zealand  Government  and 
the  local  governing  bodies  was  increased  during 
the  years  1911-13  by  approximately  £5,000,000  per 
year.  On  government  account,  therefore,  it  would 
appear  that  New  Zealand  during  this  time  was 
receiving  a  net  credit  annually  of  about  £1,700,000 
over  and  above  the  interest  payments.  Bearing  in 
mind  the  average  annual  credit  balance  of  £370,000 
on  account  of  merchandise,  we  reach  the  conclusion 
that  New  Zealand,  during  the  years  1911-13,  was 
subject  to  a  debit  balance  approximating  £2,000,000 
a  year  on  account  of  private  remittances,  interest 
on  foreign  capital  privately  invested,  shipping 
charges,  and  other  lesser  items. 

The  trade  situation  in  New  Zealand  since  the 
close  of  the  war  has  been  very  similar  to  that  in 
Australia.  As  a  result  of  a  very  favorable  trade 
balance  during  1918  and  1919,  a  large  quantity  of 
funds  was  accumulated  in  London  to  the  credit  of 
banks  operating  in  New  Zealand.  During  the  early 
part  of  the  year  1920,  however,  imports  into  the 
country  began  to  increase  rapidly.  Taking  the 
year  as  a  whole,  the  result  was  an  excess  of  im- 

*  'New  Zealcmd  Official  Year  Book,  1917,  pp.  242,  672. 


208   INTERNATIONAL  TRADE  BALANCE 

ports  amounting  to  £15,000,000.  In  addition  to 
this  adverse  balance  there  were  various  payments, 
invisible  and  otherwise,  due  in  London,  all  of  which 
it  was  necessary  to  liquidate.  The  credit  balance 
in  London  was  soon  exhausted  as  a  consequence. 
The  explanation  of  the  unexpected  change  in  the 
character  of  the  trade  balance  during  1920  may  be 
found  in  the  reasons  already  presented  in  the  case 
of  Australia.  The  underlying  causes  were  substan- 
tially the  same  in  both  countries.  And,  in  the 
main,  the  commercial  recovery  will  probably  pro- 
ceed in  both  along  generally  similar  lines.  The 
return  to  normal  conditions  will  be  marked  by  the 
reappearance  of  an  excess  of  exports. 

South  Africa 

We  have  in  South  Africa  a  country  which  pro- 
duces gold  as  a  commodity  for  export.  In  such  a 
case  naturally  there  may  be  a  steady  outflow  of 
gold  as  one  of  the  means  for  the  payment  of  im- 
ports. Gold,  in  fact,  stands  out  as  the  principal 
product  and  export  of  South  Africa.  Thus,  of  the 
total  value  of  exports,  amounting  in  1913  to  £66,- 
659,552,  gold  alone,  with  a  value  of  £37,597,000, 
constituted  over  fifty-six  per  cent.  That  country 
occupies  a  unique  position  among  the  civilized 
nations  of  the  world,  in  the  extent  to  which  it  is 
dependent  upon  the  produce  of  the  mines  for  its 
purchases  of  imported  goods.  The  only  country 
whose  position  is  at  all  similar  in  this  respect  is 
Mexico,  whose  exports  of  copper,  gold,  and  silver 


AUSTRALIA,  NEW  ZEALAND,  SOUTH  AFRICA  209 

formed  during  1913  about  fifty-six  per  cent  of  the  v^ 
total  exports,  whereas  in  South  Africa  the  exports 
of  mining  produce  amounted  in  the  same  year  to 
over  eighty  per  cent  of  the  total. 

South  Africa  has  formed  an  important  field  for 
foreign  investment.  The  gold  and  diamond  dis- 
coveries resulted  in  a  great  impetus  to  investment. 
Hundreds  of  mining  enterprises  were  floated  in 
the  years  following  the  discoveries  and  a  large 
quantity  of  capital  was  invested.  Mines  necessi- 
tated railways,  and  this  material  development  nat- 
urally reacted  on  the  growth  of  population  and  the 
general  economic  expansion  of  the  country. 

The  balance  of  trade  of  South  Africa  is  marked 
by  a  pronounced  excess  of  exports.  In  the  state- 
ment which  follows  this  appears  for  the  years 
1911-13. 

FoBEiGN  Trade  of  South  Afbica* 
(Merchandise,   bullion,   and   specie) 


Year 

Imports 

Exports 

Excess  of 
Exports 

1911    

£  million 
38.0 
39.8 

42.8 

£  million 
57.3 
63.3 
66.6 

£  million 
19.3 

1912    

23.5 

1913    

23.8 

Annual  Average. 

40.2 

62.4 

22.2 

^  statistical  Year  Book  of  the  Union  of  Sonith  Africa,  No.  4,  1915- 
16,  pp.  188,  193. 

It  would  appear  that  immediately  prior  to  the 
war  a  sum  of  over  twenty  million  pounds  was  re- 
quired annually  to  meet  the  invisible  obligations 
of  South  Africa.     Or,  in  other  words,  the  fore- 


210   INTERNATIONAL  TRADE  BALANCE 

going  excess  of  visible  credits,  averaging  £22,200,- 
000  a  year,  may  be  looked  upon  as  the  counter- 
balancing factor  offsetting  an  approximately 
equivalent  excess  of  invisible  debits. 

Undoubtedly  the  most  important  of  the  invisible 
items  in  the  South  African  balance  of  trade  is  the 
interest  charge  payable  to  foreign  owners  of  capi- 
tal invested  in  the  country.  It  was  estimated  by 
the  London  Statist  in  1914  that  South  Africa  had 
been  supplied  with  about  £450,000,000  of  foreign 
capital,  most  of  which  was  British.^  The  interest 
and  dividends  due  the  oversea  owners  of  this  capi- 
tal amounted  to  more  than  £20,000,000  a  year. 
This  one  invisible  debit,  therefore,  was  in  itself 
alone  approximately  as  large  as  the  export  bal- 
ance. 

There  are  two  other  important  invisible  items, 
one  a  debit  and  the  other  a  credit,  between  which 
there  is  roughly  an  equivalence.  It  has  been  esti- 
mated by  the  London  Economist  that  the  diversion 
of  British  capital  into  South  Africa  during  the 
years  1911-13  averaged  nearly  £5,000,000  per 
annum. ^  The  offsetting  debit,  mentioned  above, 
is  in  the  form  of  shipping  charges.  In  South 
Africa,  contrary  to  the  practice  in  Australia  and 
New  Zealand,  imports  are  recorded  on  the  basis  of 
their  value  at  the  place  of  shipment.^     Accordingly 

*The  London  Statist,  May  23,  1914. 

"  Compiled  from  the  London  Economist  by  E.  Pulsford,  "Com- 
merce and  the  Empire,  1914  and  After,"  p.  65. 

'"Dominions  Royal  Commission  Reports"    (Cd.  7505),  p.  4. 


AUSTRALIA,  NEW  ZEALAND,  SOUTH  AFRICA  211 

the  cost  of  ocean  transportation  is  not  included  in 
the  South  African  import  statistics.  It  will  be 
recalled  that  in  Australia  imports  are  entered  at 
an  increase  of  ten  per  cent  on  their  market  value 
in  the  country  of  export,  for  the  purpose  of  includ- 
ing roughly  the  insurance,  freight,  and  other  like 
charges  incident  to  transportation.  It  is  to  be 
noted  that  the  ship  tonnage  belonging  to  South 
Africa  itself  is  quite  negligible  and  therefore  may 
be  left  out  of  reckoning.  Accordingly,  by  adopting 
the  Australian  ratio  as  a  working  basis,  we  may 
compute  the  approximate  shipping  charges  to  be 
debited  against  South  Africa.  Imports  into  South 
Airica  as  shown  above  had  an  average  annual  value 
of  £40,200,000  during  the  years  1911-13.  Assum- 
ing that  the  various  shipping  charges  roughly 
amounted  to  ten  per  cent  of  the  value  of  the  im- 
ports, we  may  conclude  that  South  Africa  was 
annually  subject,  in  our  selected  period,  to  a  ship- 
ping debit  of  £4,200,000.  If  complete  official 
information  were  available  concerning  the  other 
invisible  items,  such  as  private  remittances  both 
into  and  out  of  the  country,  travelers'  expenditures, 
and  the  capital  holdings  of  immigrants,  we  should 
discover,  doubtless,  that  these  various  credits  and 
debits  would  approximately  balance.  Therefore, 
we  should  have  remaining  a  total  net  invisible  debit 
of  something  over  £20,000,000  a  year,  consisting,  as 
we  have  already  discovered,  chiefly  of  interest  and 
dividends  on  foreign  capital  invested  in  South 
Africa.     This  debit  would  be  offset  by  the  excess 


212       INTERNATIONAL  TRADE  BALANCE 

of  visible  exports  which,  as  shown  above,  averaged 
for  the  period  in  hand  twenty-two  million  pounds 
per  annum. 

An  agreement  was  reached  during  the  summer  of 
1919,  between  the  Bank  of  England  and  the  gold 
mining  companies  of  the  Transvaal,  certain  conse- 
quences of  which  we  may  take  account  of,  because 
of  their  bearing  on  international  trade  and  ex- 
change. The  close  and  mutual  relationships  be- 
tween foreign  trade,  international  indebtedness, 
and  exchange  rates  are  illustrated.  This  agree- 
ment removed  the  restrictions  on  the  export  of 
gold  from  South  Africa  which  prevailed  during 
the  war  and  thus  reestablished  a  free  market  for 
the  gold  of  that  country.  During  the  war  the  gold 
producers  were  under  contract  to  sell  their  gold  to 
the  Bank  of  England  at  £3.  17s.  dd.  per  ounce. 
Under  the  new  scheme,  which  relieved  the  Trans- 
vaal companies  from  selling  their  metal  at  a  fixed 
price  and  receiving  their  payment  in  British  cur- 
rency, they  were  enabled  to  send  their  gold  to  any 
market  where  it  might  be  to  their  advantage  to  sell. 
It  thus  became  possible  at  once  to  ship  their  gold 
to  the  United  States,  and  to  remit  the  proceeds 
to  London  through  the  purchase  of  sterling  ex- 
change. By  reason  of  the  depreciation  of  sterling 
rates  in  New  York,  such  a  transaction  became 
unusually  profitable. 

The  profit  in  this  operation  grew  out  of  the  dis- 
count on  sterling  exchange.  It  was  announced  in 
the  London  Times  of  July  25,  1919,  that  "already 


AUSTRALIA,  NEW  ZEALAND,  SOUTH  AFRICA  213 

an  experimental  shipment  of  50,000  ounces  of  gold 
has  been  made  to  the  United  States  of  America. 
Owing  to  the  premium  which  dollars  command 
in  relation  to  sterling,  the  gold  has  realized  about 
85s.  6d.  per  standard  ounce,  as  compared  with  77s. 
dd.  (£3  17s.  dd.)  paid  to  the  companies  by  the 
Bank  of  England." 

A  more  detailed  statement  of  the  manner  in 
which  the  profit  grew  out  of  the  discount  on 
sterling  exchange  has  appeared  in  the  New  York 
Annalist.^  When  the  Transvaal  gold  miners  send 
their  gold  to  the  United  States  "they  get  the  full 
United  States  mint  price  of  |20.672  per  fine  ounce 
for  their  fine  gold,"  we  are  reminded  by  The 
Annalist. 

"Payment  is  made  in  American  money,  and  the 
amount  figures  out  at  the  equivalent  of  £3  17s.  9d. 
in  London.  But,  having  the  money  in  New  York, 
they  are  enabled  to  buy  exchange  on  London,  which 
is  also  payable  in  British  currency,  and  they  can 
buy  pounds  at  the  rate  of  exchange  and  make  the 
difference  between  the  current  rate  and  the  parity 
of  exchange. 

"In  other  words,  if  the  Transvaal  gold  were  to  be 
originally  figured  in  dollars,  instead  of  in  sterling, 
the  miners  under  the  old  agreement,  would  have  to 
produce  |4,866,500  in  gold  before  they  could  get 
£1,000,000  in  sterling  in  London.  But  with  ex- 
change at  |1.40  to  the  pound,  they  could  export  to 
the  United  States  approximately  only  11,400,000  in 
gold  and  still  buy  £1,000,000  in  British  currency  in 
London. 

*  The  New  York  Annalist,  August  4,  1919. 


214      INTERNATIONAL  TRADE  BALANCE 

"Expressed  somewhat  differently,  under  the  old 
arrangement  of  a  fixed  price  in  British  currency, 
it  took  235,403%  ounces  of  fine  gold  to  get  the 
£1,000,000  currency.  Now  by  sending  the  metal 
to  the  United  States,  selling  it  to  the  American 
mint  at  the  going  rate  here,  and  transferring  the 
funds  back  to  London  by  way  of  the  foreign  ex- 
change market,  only  212,838  ounces  of  fine  gold 
would  be  needed.  It  would,  of  course,  take  a  little 
more  to  complete  the  transaction,  for  there  would 
be  the  loss  of  interest  while  the  gold  was  in  transit 
between  South  Africa  and  the  United  States,  and 
there  would  be  the  costs  of  shipping  and  insurance. 
But  in  gold  operations  these  are  minor  considera- 
tions, especially  now  that  the  war  is  over  and  there 
are  no  more  U-boats  operating  along  the  shipping 
channels." 

The  foregoing  is,  of  course,  not  to  be  interpreted 
as  meaning  that  it  was  better  for  sterling  exchange 
that  South  African  gold  be  sold  in  New  York,  as 
outlined  above,  than  directly  to  the  Bank  of  Eng- 
land. The  ultimate  effect  upon  the  sterling  rate 
would  have  be^n  the  same  whether  a  given  quantity 
of  gold  were  disposed  of  in  New  York  for  American 
currency,  with  which  sterling  would  then  be  pur- 
chased, or  sold,  in  the  first  instance,  to  the  Bank 
of  England  and  then  used  in  paying  British  debts 
in  New  York.  The  same  quantity  of  gold  would 
ultimately  have  reached  the  United  States,  to  con- 
tribute toward  the  reduction  of  Great  Britain's 
indebtedness. 


INDEX 


Amsterdam,  as  a  financial  cen- 
ter, 91 

Anderson,  B.  M.,  on  private 
loans  to  Europe,  72 

Annalist,  The  New  York,  on 
South  African  gold  to  New 
York,  213 

Argentine,  trade  balance  and 
foreign  borrowing,  21 

Austin,  O.  P.,  on  paper  cur- 
rencies, 32 

Australia,  merchandise  balance, 
187,  188,  189,  190,  192;  tran- 
sition in  trade  balance  in 
1892,  189;  London  indebted- 
ness, 190,  191,  192,  194,  203; 
invisible  items  of  balance, 
188;  interest  payments 
abroad,  190,  195,  196,  203; 
immigrant  funds,  198;  private 
remittances,  199 ;  shipping, 
199,  200;  trade  balance  sheet, 
201;  World  War  and  trade, 
203 

Balance  (equation)  of  interna- 
tional indebtedness,  various 
elements  of,  13 ;  relation  to 
merchandise  balance,  18,  19, 
20,  21 ;  international  trade 
tends  toward  equation  of  in- 
debtedness, 23,  24,  42,  43;  in- 
fluence upon  foreign  exchange, 
22,  34,  35,  38,  39 ;  balance  of 
payments  of  United  States 
since  the  War,  76,  77 

Balance  of  trade,  elements  of, 
14;  favorable,  4;  adverse,  14; 
law  of,  15 ;  affected  by  de- 
preciation of  currency,  34,  35, 


38,  39 ;  condition  of  in  Eu- 
rope in  1917  to  1919,  35,  36 

Balance  sheet,  of  United  States, 
63;  of  United  Kingdom,  113; 
of  Canada,  130;  of  India, 
164,  167;  of  Australia,  201 

Bastable,  C.  F.,  on  the  stable 
condition  of  trade,  5;  on  sig- 
nificance of  international 
loans,  19 

' '  Boarding ' '  Expenses,  factor 
in  trade  balance,  13,  112 

Board  of  Trade,  British,  esti- 
mate of  earnings  of  merchant 
marine,  111;  basis  of  valua- 
tion of  imports  and  exports, 
110 

Borrowing  countries,  immature, 
8 ;  mature,  8 ;  their  trade  bal- 
ance, 9,  81,  189,  190 

British  currency,  internal  and 
external  value,  34 

British  foreign  investments, 
volume  of,  2,  81,  105,  115; 
geographical  location,  106, 
107 

Caimes,  J.  E.,  on  condition  of 
American  trade  balance,  51 

Canada,  balance  of  trade  before 
War,  121,  131;  immature  bor- 
rower before  1914,  8,  119; 
reaching  stage  of  mature  bor- 
rower, 9,  134,  137;  British 
capital  invested  in,  120,  122, 
132,  133 ;  American  capital 
invested  in,  121,  125,  132, 133, 
139;  economic  expansion  be- 
fore 1914,  122,  123;  invisible 
items  of   balance,    125,   136; 


215 


216 


INDEX 


interest  and  dividends  pay- 
able abroad,  125;  capital  of 
immigrants  and  emigrants, 
126;  private  remittances,  128; 
trade  balance  sheet,  130; 
trade  with  United  Kingdom 
and  United  States,  131,  132; 
balance  of  trade  during  War, 
134;  foreign  borrowings  since 
1914,  139;  gold  points  in  ex- 
change   with    United    States, 

142,  143;  war-time  fluctua- 
tions of  New  York  exchange, 

143,  145;  sterling  quotations 
in,  147,  148;  premium  on 
American  funds  not  result  of 
manipulation,  150,  151;  cus- 
toms regulations  and  the  ex- 
changes, 155,  156 

Civil  War,  effect  of  upon  trade, 
47 ;  effect  upon  currency  and 
prices,  48;  upon  American 
merchant  marine,  49 

Council  drafts,  importance  in 
Indian  exchange,  173,  177, 
178,  180;  purpose  of,  174, 
177,  178 

Crammond,  E.,  on  invisible 
credits  in  British  trade  bal- 
ance, 103 

Credits,  international,  invisible 
and  visible,  17;  equivalence 
between  total  debits  and,  23, 
24,  42,  43 

Crises,  United  States,  of  1837, 
45;  of  1873,  46,  47,  52;  of 
1893,  53,  54,  56 

Currency  inflation,  and  exchange 
fluctuations,  33,  38,  39 ;  its  in- 
fluence on  foreign  trade,  34, 
35,  38,  39 


Debits,  international,  invisible 
and  visible,  17;  equivalence 
between  total  credits  and,  23, 
24,  42,  43 

Depreciated  currency,  influence 
on  rate  of  exchange,  31,  32, 
38,    39,    151;    influence   upon 


exports  and  imports,  34,  35, 
36,  37,  38 

Diagrams,  Argentine  trade  bal- 
ance and  foreign  borrowings, 
22;  American  trade  balance 
and  sterling  sight  rates,  28; 
the  internal  and  external  de- 
preciation of  British  pound, 
36;  trade  balance  of  United 
States,  43;  British  balance  of 
trade  before  1820,  83,  84; 
British  trade  balance,  1821  to 
1878,  99;  British  trade  bal- 
ance, 1879  to  1913,  102;  Ca- 
nadian trade  balance,  1867  to 
1921,  135;  fluctuations  in 
American  exchange  rate  in 
Canada,  1910  to  1919,  146; 
fluctuations  of  American  ex- 
change in  Canada,  1917  to 
1921,  147;  Montreal  quota- 
tions of  both  sterling  and  dol- 
lar exchange  during  1920, 
148;  trade  balance  of  India, 
1864  to  1914,  171;  trade  bal' 
ance  of  New  Zealand,  1853  to 
1914,  206 

Dislocated  exchanges,  their 
cause,  31,  32 

Dutch,  The,  early  eminence  of 
merchant  marine,  93,  94,  95 ; 
importance  as  money  lenders, 
89,  90 

Economist,  London,  on  British 
capital  in  South  Africa,  210 

Elizabeth,  Queen,  borrowed 
capital  from  Dutch,  88;  ex- 
tended loan  to  Flanders,  89 ; 
stimulated  growth  of  British 
shipping,  94 

Emigrants,  capital  carried  from 
United  Kingdom  by,  113,  198 

EquatioH  of  indebtedness  al- 
ways approximated,  24,  27 

Expenditures  abroad  by  trav- 
elers,  13,   55,   62 

Exports,  visible  and  invisible, 
12;  under  a  depreciated  cur- 
rency, 34,  35,  40,  41;  nature 


INDEX 


217 


of  bounty  on,  33,  34,  38,  39; 
influence  of  exchange  fluctua- 
tions on  Franco-American 
trade  in  1919,  154;  method  of 
computing  values  of,  84 

Field,  F.  W.,  on  Canadian  bor- 
rowing abroad,  122 

Financial  center  of  world  moved 
westward,  87,  89 

Foreign  exchange,  relation  to 
balance  of  trade,  25,  26,  27, 
152;  fluctuations  of  under 
normal  conditions,  24,  25,  33, 
37,  152,  153;  under  depre- 
ciated paper,  25,  34,  35,  36, 
37,  38;  effect  of  fluctua- 
tions on  trade,  bounty  on  ex- 
ports, 35,  36,  38,  153,  154, 
155;  bounty  on  imports,  34, 
35,  36,  38,  153,  154,  155;  ef- 
fect of  War  on  exchange 
rates,  29,  31;  limit  of  fluc- 
tuations of,  29 ;  international 
gold  movements  and,  30;  ex- 
change and  state  of  the  cur- 
rency, 32,  38,  39;  value  of  ex- 
change and  supply  and  de- 
mand, 38,  141,  153,  154;  ex- 
change relations  between  Can- 
ada and  the  United  States, 
140,  141 ;  premium  on  ex- 
change and  its  effect,  35,  36, 
39,  149 ;  exchange  fluctuations 
and  customs  regulations,  155, 
156 ;  Indian  exchange  situa- 
tion since  1893,  175,  176,  180, 

184,  185,  186;  price  of  silver 
and  Indian  exchange,  174, 
175,  176,   178,  179,   180,  184, 

185,  186;  World  War  and  In- 
dian exchange,  180,  181,  182, 
183 

Foreign  investment  of  capital, 
origin  of,  87;  example  of 
early  lending,  88,  89 

France,  a  lending  and  importing 
country,  82 ;  exchange  on 
New  York  during  War  and 
effect  on  trade,  154,  155 


Gazetteer,  The  Imperial,  of  In- 
dia, on  Indian  exchange  and 
trade,  173 

General  prices,  relation  to  bal- 
ance of  trade,  26,  37,  41,  78, 
151;  an  automatic  check  on 
permanent  inflow  or  outflow 
of  gold,  15,  16;  in  United 
States  after  1860,  47,  48;  and 
specie  premium,  35,  36,  39,  41 

Germany,  pre-war,  an  importing 
country,  82 

Giffen,  Sir  Eobert,  on  the  bal- 
ance of  trade,  6 ;  on  invisible 
exports  and  imports,  16;  on 
earnings  of  British  merchant 
marine,  110;  on  British  re- 
ceipt of  interest  from  abroad, 
105 

Gold,  international  movement 
of,  and  conditions  of  trade, 
25 ;  effect,  on  foreign  ex- 
change rate,  of  suspension  of 
gold  shipments,  33;  gold  em- 
bargoes and  foreign  exchange, 
31,  32;  gold  imports  into 
United  States  during  War, 
67,  68 

Gold  (specie)  points,  their 
operation,  26,  27;  cease  to 
function  with  suspension  of 
free  gold  movements,  29,  30; 
in  exchange  between  Canada 
and   United  States,   142,   143 

Gold  (specie)  premium,  influ- 
enced by  trade  balance,  34, 
38 ;  influenced  by  currency 
conditions,  35,  36 ;  its  influ- 
ence upon  exports  and  im- 
ports, 34,  35,  36,  39,  40,  41, 
155 

Goschen,  Viscount,  on  exchange 
fluctuations,  under  normal 
conditions,  25;  under  depre- 
ciated currency,  34 

Hobson,  C.  K.,  on  foreign  capi- 
tal investment,  89,  91 ;  on  pri- 
vate remittances  to  England. 
112  ^         ' 


218 


INDEX 


Holland,  important  source  of 
capital  during  seventeenth 
and  eighteenth  centuries,  88, 
89,  91 

Immigrant,  remittances,  13,  55, 
57,  62,  71;  capital  carried  by 
immigrants  entering  Canada, 
126,  127;  entering  Australia, 
198 

Imports,  visible  and  invisible, 
12;  under  a  depreciated  cur- 
rency, 34,  35,  40,  41;  under 
depreciating  silver  currency, 
174,  177;  method  of  record- 
ing, 84 

India,  merchandise  balance  of 
trade,  159,  160,  180;  mature 
borrower,  8,  9 ;  balance  sheet 
of,  164,  167;  dependence  on 
foreign  capital,  165,  170,  171; 
invisible  debits  against,  159, 
160,  161,  167,  169,  170; 
funded  debt  of,  166,  172;  ex- 
change system  before  1893, 
174,  175 ;  exchange  system 
since  1893,  175,  176,  178,  179, 
180;  War  and  exchange  sys- 
tem, 181,  182,  183;  currency 
system,  176,  177,  178,  180, 
181,  185;  exchange  stabilized 
after  1893,  175,  179,  180 

Interest  payments  on  capital  in- 
ternationally invested,  6,  7 ; 
influence  of  upon  trade  bal- 
ance, 5,  6,  9,  19,  20;  interest 
to  United  States  Government 
by  European  Governments 
postponed  till  1923,  76,  77 

International  lending  and  bor- 
rowing, method,  12,  13;  lend- 
ing countries,  mature  and  im- 
mature, 7,  8 ;  borrowing  coun- 
tries, mature  and  immature, 
8;  effect  on  commerce  and 
trade  balance,  12,  13,  23 
Invisible  items  in  trade  balance, 
16 

Journal  of  Canadian  Bankers 
Association,       on       exchange 


rates  and  balance  of  trade  be- 
tween Canada  and  United 
States,  143,  144 

Keynes,  J.  M.,  on  Indian  ex- 
change system,  177 

Knibbs,  G.  H.,  on  effect  of  Aus- 
tralian borrowing  abroad,  191 

Lending  countries,  mature  and 
immature,  7,  8;  their  trade 
balance,  9,  80 

Levi,  L.,  on  British  balance  of 
trade,  85,  100 

Litman,  S.,  on  American  export 
balance,  67 

London  Economist,  The,  on 
British  capital  in  South  Af- 
rica, 210 

London  Statist,  The,  on  Brit- 
ish capital  in  South  Africa, 
210 

London  Times,  on  Indian  com- 
mercial outlook  in  1920,  185, 
186;  on  sale  of  South  African 
gold  in  New  York  in  1919, 
212,   213 

Mercantile  Doctrine,  The,  3,  14 

Merchandise  trade  balance,  of 
United  States,  58;  United 
Kingdom,  104;  Canada,  124, 
125;  India,  159,  160;  Aus- 
tralia, 187,  188,  193;  New 
Zealand,  204;  South  Africa, 
209 

Merchant  marine,  earnings  im- 
portant in  British  balance,  13, 
94,  95,  110;  important  in 
American  balance  before 
1860,  44,  45,  46;  of  United 
States  since  War,  65,  70 

Monetary  Times,  The,  on  effect 
of  Canadian  borrowings 
abroad,  137;  on  volume  of 
American  investments  in  Can- 
ada, 125 

Nash,  R.,  on  volume  of  British 
capital  in  Australia,  196,  197 


INDEX 


219 


National  prosperity  and  the 
trade  balance,  20 

New  Zealand,  external  trade  of, 
204,  205;  balance  of  trade, 
206,  207,  208;  invisible  items 
in  balance  of,  205,  206,  207; 
trade  of  since  War,  208 

Paish,   Sir    George,    on    British 
foreign  investments,  3,  81,  82, 
105,   108,   116;    on  the  "bal- 
ance of  trade, "  5 ;  on  foreign 
capital  in  United  States,  59; 
on    expenditures    abroad     of 
American  travelers,  61,  62;  on 
British  capital  in  Canada,  120 
Paper    currencies,    when    depre- 
ciated the  predominant  influ- 
ence   on    exchange    rate,    32; 
bewildering  array   in  Europe 
of,  32,  33 
Patterson,    E.    L.    Stewart,    on 
New  York  as  exchange  center 
of    continent,    141;    on   trade 
balance     and     exchange     be- 
tween   Canada    and     United 
States,  143,  144 
' '  Pegged ' '    exchange,     sterling 
pegged    at    New    York,    37, 
74;    sterling   value    of    rupee 
pegged,  179,  184 
Pittman  Act,   182 
Precious    metals,    early    impor- 
tance attached  to,  14 
Premium  on  exchange,  influence 
upon  exports,  on  imports,  35, 
36,   38,   39,    40;    influence   in 
either    direction,    34,    38,    39, 
155 

Eeverse  Councils,  179,  180,  184 

Beview  of  Economic  Statistics, 
on  American  commerce  and 
the  trade  balance,  48,  49,  55, 
61 

Roberts,  G.  E.,  on  capital  in- 
vestments, 83 

Rupee,  fluctuating  value  before 
1893,  174;  influence  on  In- 
dian trade  before  1893,  173, 


175;  value  before  1914  sta- 
bilized, 175,  179,  180;  value 
since  1914,  181,  182,  184,  185, 
186 

Ship   earnings,   invisible  factor 
in  trade  balance,   13,   19,  55, 
65,  95,  96,  110,  199,  200,  207 
Silver,  values  before  1893,  173, 
174,   175;    importance   in   In- 
dian exchange,  175,  176,  180; 
War  and  value  of,  181,  182, 
183,  184,  185,  186 
Smart,   W.,    on   importance    at- 
tached  formerly    to    precious 
metals,  14 
Smith,    Adam,    on    balance    of 

trade,  15 
South  Africa,  gold  the  prmcipal 
export    of,    208;    balance    of 
trade,  209 ;  invisible  items  of 
balance,  210;   restrictions  re- 
moved on  export  of  gold,  212 
Specie  payments,   suspended  m 
United  States^in  1861,  47,  48; 
resumed  in  1879,  53 
Specie    (gold)    points,  their  op- 
eration, 25;  cease  to  function 
with  suspension  of  free  gold 
movements,    29,    31;     in    ex- 
change between   Canada  and 
United  States,  142,  143 
Specie    (gold)    premium,    influ- 
enced by  trade  balance,  34,  37, 
38;     influenced    by    currency 
conditions,  34,  35,  39,  40;  its 
influence  upon  exports  and  im- 
ports, 35,  36,  40,  41,  155,  156 
Statist,  London,  on  British  capi- 
tal in  South  Africa,  210 
Sterling  exchange,  normal  course 
in  New  York,  27,  28 

Taussig,  F.  W.,  on  effect  of  free 
movement  internationally  of 
gold,  27;  on  divergence  be- 
tween general  prices  and 
foreign  exchange,  40 

Times,  London,  on  Indian  com- 
mercial outlook  in  1920,  185, 


220 


INDEX 


186;  on  sale  of  South  African 
gold  in  New  York  in  1919, 
212,  213 

Todd,  J.  A.,  on  method  and  pur- 
pose of  foreign  investment  of 
capital,  12,  13 ;  estimate  of 
British  income  from  foreign 
investments,  109 

Trade  balance,  reflects  net  po- 
sition of  country  as  lender  or 
borrower  of  capital,  2,  3 ; 
views  embodied  in  Mercantile 
Doctrine  concerning,  3;  tran- 
sition in  balance  to  conform 
to  change  in  conditions,  4,  5, 
6,  18,  20,  21;  and  national 
prosperity,  20 

Travelers '  expenditures  abroad, 
invisible  factor,  13,  55,  57,  61, 
62,  72 

Tucker,  Josiah,  on  foreign 
trade,  4 

United  Kingdom,  great  import- 
ing and  creditor  nation,  80 ; 
foreign  investments  of  capi- 
tal, 3,  81,  82,  105,  106; 
immature  lender  and  mature 
lender,  7,  8,  10;  exchange 
rate  on  New  York,  27,  28; 
disparity  between  internal 
and  external  value  of  British 
pound,  36,  37 ;  overturn  in 
1823  in  trade  balance,  84; 
mode  of  ascertaining  import 
and  export  values,  84,  96,  97 ; 
balance  of  trade,  85;  early 
lending  and  borrowing  opera- 
tions, 88,  89,  92;  investments 
abroad  after  1815,  93;  ship- 
ping charges  against  before 
1750,  93;  navigation  acts,  94; 
invisible  items  of  balance,  95, 
104,  105,  110,  111,  112;  large 
credit  balance  of  invisible 
items,  97,  116;  significance  of 
excess  of  merchandise  imports, 
98,  100;  merchandise  balance, 
1911-13,  107;  export  of  capi- 
tal, 106,  108;  interest  receipts 


from  abroad,  104,  105,  107; 
location  of  British  foreign  in- 
vestments, 107;  earnings  mer- 
chant marine,  95,  110;  official 
basis  of  valuing  imports  and 
exports,  84 ;  emigrants  and 
capital  export,  113;  trade  bal- 
ance sheet,  113;  War  and 
trade  of,  114;  loans  secured 
abroad  during  War,  115,  116; 
net  position  as  lending  coun- 
try, 118;  depreciation  of 
sterling  exchange  since  1915, 
117 
United  States,  transition  in 
trade  balance,  1874,  21,  52, 
64,  119;  preeminent  as  ex- 
porting nation,  42,  77;  excess 
of  imports  before  1820,  44; 
invisible  items  of  balance,  43, 
49,  55,  57,  58,  59,  63,  70,  71, 
75;  trade  balance  sheet,  1911- 
13,  63,  64;  early  imports  of 
foreign  capital,  59 ;  foreign 
capital  invested  in,  44,  49,  50, 
53,  54,  55,  58,  61,  75;  Ameri- 
can  capital   invested   abroad, 

61,  70,  71,  73,  75;  merchant 
marine  and  Civil  War,  47 ; 
merchant  marine  and  World 
War,  65,  70 ;  American  lend- 
ing during  War,  65,  66,  73 ; 
American  lending  since  Armi- 
stice, 71,  72,  76;  balance  of  in- 
debtedness, 55 ;  immature  and 
mature  borrower  of  capital,  8, 
9,  10,  52 ;  immature  lender  of 
capital  since  1917,  7,  8;  trade 
balance  and  World  War,  64, 
66,  67,  73;  gold  imports  and 
War,  68 ;  reverse  movement  in 
securities,  54,  68  ;  government 
loans  and  the  World  War,  69, 
71;  travelers'  expenditures 
abroad,  55,  57,  61,  70,  72,  78; 
immigrant  remittances,  55,  57, 

62,  63,  70,  72,  78 

Vanderlip,  F.   A.,   on   exchange 
fluctuations,  152 


INDEX 


221 


Walker,  Sir  Edmund,  on  Can- 
ada 's  foreign  indebtedness, 
120,  125;  on  interest  rate  on 
foreign  investments  in  Can- 
ada, 125 

War,  World,  and  connection  be- 
tween trade  and  international 
lending  operations,  1 ;  and 
trade,  31;  effect  on  exchange 
rates,  29,  31;  and  American 
trade  balance,  64,  66 ;  British 
commerce  and  trade  balance, 
114;  Canadian  commerce  and 
trade  balance,  134;  Indian 
commerce,  181,  185,  186;  In- 
dian  currency   and   exchange, 


182,  183,  184;  Australian 
trade,  203;  New  Zealand 
trade,  207 ;  gold  mining  of 
South  Africa,  212 

Wells,  D.  A.,  on  American  trade, 
50 

White,  Sir  Thomas,  on  capital 
carried  by  immigrants  into 
Canada,  126 

Williams,  J.  H.,  on  British 
financial  policy,  117,  118 

Withers,  Hartley,  on  nature  and 
importance  of  invisible  fac- 
tors of  trade  balance,  17, 
18 ;  on  British  trade  balance, 
98. 


I 


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